Should An Investor Subscribe it or not ?

Introduction

Tata Sponge Iron Ltd has planned to raise about ₹1,650 crore through a rights issue. The board has approved to issue 3.3 crore equity shares on rights basis to the eligible shareholders.

Company Overview

• Tata Sponge Iron Limited, incorporated in 1982, a subsidiary of Tata Steel, wherein Tata Steel holds 54.5% shareholding.
• Tata Sponge Iron Ltd is engaged in business of manufacturing high-grade sponge iron. The company has emerged as one of India’s largest merchant sponge iron manufacturers.
• It is engaged in the production of sponge iron by direct reduction method of iron ore and power generation from waste heat. Company produces and markets sponge iron, which is a single end use (steel making) and a single grade product.

What is Right Issue?

A rights issue is a way by which a listed company can raise additional capital. However, instead of going to the public, the company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings.

Tata Sponge Iron Ltd – Rights Issue

Rights Issue Details

• Tata Sponge Iron Ltd’s board has decided to raise about ₹1,650 crore through a rights issue. The board has approved to issue 3.3 crore equity shares of face value of Rs.10 each on rights basis to the eligible shareholders.
• The record date has been fixed at June 25, 2019.
• The issue will open on July 2, 2019 and the issue closing date is July 16,2019. 
• The rights entitlement ratio has been fixed to be 15: 7. It means, at 15 rights equity shares that an eligible equity shareholder is entitled to, in proportion to 7 equity shares held by such equity shareholder on the record date.
• The issue price has been fixed at Rs.500 per Rights equity share (including a premium of Rs.490 per Rights equity share). 
• Current Market Price on Rights Issue Declaration Date (June 13, 2019) was Rs.725 per share. It shows the company has offered a Rights issue almost at 30% discount to current market price. Thus, the company has ensured that the rights issue will sail through by pricing the issue at a huge discount to the prevailing price.

Key Financials of Tata Sponge Iron Ltd

• Current Market Capitalization = Rs.1,030 Cr. It is a small cap company.
  • We can see that the company is raising capital of Rs.1,650 Cr. through rights issue. It means the company is planning to raise money even more than its market capitalization. It signals the aggressive expansion strategies to be employed by Tata Sponge Iron Ltd in coming future.
  • Also, the company has a strong backing from its parent company which has 54.5%. Such a promising stake by the promoters of Tata Sponge Ltd indicates the confidence they are having about the performance as well as the future growth and expansions of the company.
• ROCE = 23% : Even being a capital-intensive business, the comapny has given promising ROCE numbers. It is indicating the % returns the comapny is getting for the given employed capital.
• ROE = 15.22% : Return on equity of 15.22% is also a very good indication of the compan’s performance.
• D/E Ratio=0 : Debt to equity ratio is zero. Thoungh being a capital intensive company, Tata Sponge Ltd is debt-free. Its is really a very positive sign of the company
• PE Ratio = 8.28 : PE ratio of 8.28 tells us the current fair valuation of the company. Historical 3-year, 5-year and 10-year PE figures are 16.5, 13 and 13 respectively. Thus, we can get a clear idea regarding the current fair valuation of the Tata Sponge Ltd.