At first glance one may be led to an opinion that buying 51 per cent of the 90 per cent of the steel capacity in India would cost the potential investor a mere Rs 3,630 crore. This is phenomenal, because for an investment of Rs 3,630 crore one gets close to 33 million tonnes of crude steel capacity and 24 million tonnes of finished steel capacity.

This is indeed cheap if one takes into account that Jindal, Essar and Ispat have each spent in excess of Rs 4,000 crore for setting up plants of 1.5 million tonnes of HR products. Moreover, a sum of Rs 3,630 crore allows ownership to real assets worth Rs 40,340 crore -- showing that Indian companies are available at acheap rate.

A similar inference can be drawn if one looks at the book value of the steel companies. Most of them are trading at 70-80 per cent discount to the current book value.

Nevertheless, the problem for the potential investor is the debt exposure of some of the companies. With steel prices down, it is quite likely that the acquirer will find it difficult to meet the interest expense. For some of the plants the interest is up to 15 per cent of the cost of production. If any one would like to run the plants with continuous positive cash flow, he will have to bring in additional funds to reduce the debt. Assuming that he pays off the entire debt, the total funds to be forked out for buying the entire steel capacity works out to Rs 38,774 crore. With the net asset value of the industry at Rs 40,340 crore, the loan funds reduce the attractiveness of the whole deal.

But if one were to look at individual companies such as Bhusan Steel, the maximum funds required by the investor would be Rs 328 crore foracquiring a CR plant worth Rs 546 crore. Further, once the debt is gone, the interest component (10 per cent of total cost), the company looks quite attractive. The same logic holds true for LLyods Steels and Jindal Vijaynagar.