The valuation, made earlier this year, is far lower than Tata Steel's asking price of Rs 550-600 crore. It is believed that ACC, along with LaFarge who has also been shortlisted, has bid much below the reserve price.

The ACC board is meeting on Tuesday to consider a rights issue and a preferential allotment to fund future expansion and acquisitions.

The think-tank has stated in a report that the present value of Tata Steel's cement division is Rs 264 crore and could scale up to Rs 279 crore only if Tata Steel bears the expansion cost, proposed earlier, at its Jamshedpur unit.

This could increase the unit's capacity by 0.5 million tonnes. At present, Tata Steel has a slag cement capacity of 1.78 million tonnes. And with the bidding process on to divestthe unit, the proposed expansion is unlikely to be effected.

Tata Steel, says the think-tank study, can justify an offer price of Rs 400 crore only if the net cement realisation (NCR) at the Jamshedpur unit is raised to Rs 1,550 per tonne.The Jamshedpur unit, with a capacity of 1.41 million tonnes, has an NCR of Rs 1,338 per tonne, while the Raipur facility has an average NCR of Rs 1,150 per tonne.The central think-tank has foreseen two scenarios: one, where funds mop-up by ACC through equity dilution amounts to Rs 200 crore, and second, if the cement giant raises Rs 260 crore to fund the acquisition of Tata Steel's cement division.

A third possibility had also been envisaged where expansion could be funded entirely through internal accruals, but since ACC has announced an equity dilution through a rights issue this no longer appears to be relevant.

The study states that if fresh equity generates Rs 200 crore for ACC, either the Chaibasa and Jamul projects, or the Wadi project can be executedimmediately. However, market conditions favour execution of the Wadi project first, the study points out. Issuing fresh equity of Rs 260 crore, on the contrary, will allow the company to pursue a faster growth path through additional acquisitions and immediate modernisation. The equity infusion will also fund simultaneous capacity expansion at Chaibasa, Jamul and Wadi, alongside acquisition of Tata Steel's cement division.

According to the study, under the first scenario, the total investment required till 2005 will amount to a whopping Rs 4,000 crore. This will enable the company to corner a market share of 19 per cent by 2005. The debt-equity ratio is slated to be 1.39 by 2000. Net profit is estimated to rise to Rs 400 crore by 2002-3, by when the return on capital employed will rise above the cost of capital.

Under an alternative scenario, ACC will add about 8 million tonnes by 2002, if the equity dilution generates Rs 200 crore, and a further 8-9 million tonnes by 2005. The total capacity, in thiscase, will touch 28 million tonnes six years from now. ACC will increase its capacity by about 11 million tonnes by 2002 and a further 10 million tonnes by 2005, taking its total capacity over 30 million tonnes by 2005. The total investment that ACC could make by 2005 will be Rs 5,000 crore.

INSIGHT
Rights issue to improve debt-equity ratio

ACC's rights-cum-preference issue is likely to be designed to improve its capital structure. The company has a debt:equity ratio of 1.46, which is likely to come down to 1.41 in the next financial year and drop further subsequently. The think-tank's report talks of an investment of Rs 1,700 crore until 2002, which will raise the capacity to at least 8 million tonnes. Under this scenario, the total asset base will increase to a minimum of 4,174 crore. Given the required debt-equity ratio, the additional equity raised through rights and preferential issue for an investment of Rs 1,700 crore will have to be around Rs 740 crore.