Reports indicate that Jindal Strips is pitching for SAIL's Salem Steel plant, becoming the first Indian company to do so. There is little doubt that if Jindal Strips manages to acquire the Salem Steel plant, the company will benefit a lot. The biggest advantage will be that Salem will be consuming steel slabs from its plant. Further, with the Salem plant located on the coast and having a substantial turnover from the export market, Jindal will have access to these markets. Unlike carbon steel, stainless steel has not been badly affected by the downturn in the South east Asian economy.

Stainless steel is the most growth-intensive among all steel categories. Stainless steel accounts for a mere 2.2 per cent of the world steel production. However, it accounts for around 10 per cent of the total revenue of the steel industry, and world average stainless consumption has increased by around 6 per cent annually. With the rise in nickel prices, stainless steel prices have also followed suit.The prices of stainless steel globally are linked to the prices of nickel & chromium, which constitute about 60 per cent of the total raw material cost used in manufacturing of stainless steel.

In the domestic stainless steel segment, compounded average growth of around 10 per cent has been witnessed over the last two decades and during the last two years, the growth rate had been around 5-6 per cent. This is primarily because the domestic stainless steel demand is from the utensil market, which has not been directly hit by the global recessionary effects. The stainless steel market in India is pre-dominantly in the utensil sector grade which accounts for 70-75 per cent of the total stainless steel demand of around 650,000 tpa.

In the utensil sector, 200 series grade is used, of which Jindal Strips is the largest producer in India. During the financial year 1998-99 Jindal produced 2,30,000 tonnes of stainless steel and is at present holding around 35 per cent of the total domestic market share. Salem, onthe other hand, has a 5 per cent market share in the domestic market. Salem exports around 20,000 tonnes of stainless steel as compared to 2,000 tonnes of Jindal.

Thus the acquistion of the Salem plant will not only enhance Jindal's domestic position, but also improve its international standing at a time when demand and prices have started picking up.

However, how will Jindal finance the deal? Total loan funds as on March 31, 1999, stood at Rs 498 crore. While its networth at the end of the same period is around Rs 430 crore. Loan repayments during the financial year 1999-2000 are approximately Rs 65 crores. During the year 1998-99, interest charges rose to Rs 87.89 crore as compared to Rs 29.08 crore in the previous year. On the other hand, profits before interest and tax in 1998-99 were Rs 122.18 crore, which means that interest cover was just 1.39.

For its cold-rolling project, the company will be needing more funds. The company has already completed Phase-I of its cold-rolling project at a cost ofRs 77 crore, which has been funded by rupee term loan of Rs 50 crore from ICICI and balance by internal accruals. The company is in the process of implementing phase-II of its cold rolling project to increase the cold rolling capacity by 60,000 tpa, the cost of which has been appraised by the ICICI at Rs 250 crore. The project would be funded by debt and equity in the ratio of 50:50. The project is expected to be completed by March 2001 and major chunk of expenditure would be incurred in the financial year 2000-2001.

The company's stock is hovering at a 52-week low of Rs 33.90 and had not taken part in the rally in steel sector stocks recently. The restructuring that has taken place in the company does not seem to have enthused investor confidence in the company. One of the main reasons is the forthcoming equity dilution with an aggregate face value of Rs 15 crore. The company had in 1997-98 raised 12.5 per cent redeemable cumulative preference share aggregating Rs 5 crore on private placement basis.

Continuous need for fund is one of the reasons that is keeping the stock price low. Given these conditions, even though the acquisition of Salem makes a lot of business sense, it is unlikely that the Jindal Strips scrip will see any improvement.

As far as SAIL is concerned, it has been contemplating selling off the Salem plant on account of its high cost of production. However, if the sale goes through Alloy Steel Plant, which meets 20 per cent of Salem's raw material requirement will be further hit as Jindal will be in a position to supply the raw material from its own plants.

With contributions from Shishir Asthana