Sterlite Industries Goes for Additional Fund Raising of $500 Million
The stock is down 6.5% on news of this capital raising activity. Most experts of CNBC-TV18 have expressed surprise on this decision. They also estimate that the fund raising amounts to approximately 1.1% of earnings dilution based on current capital structure. Even though the earnings dilution is negligible, the reason why the stock has reacted so negatively is the suspicion that the funds are to be used for activities which the company is not publicly stating.
In a statement released to the NYSE, the Vedanta group says that the money is being raised to fund a brownfield project to expand a copper smelter in India to the tune of rupees 23 billion which is approximately $500mn. They also claim that post this expansion, the smelter would be the largest of its kind in India. Although the explanation is plausible, it's not probable.
Sterlite Industries has enough cash on its books to fund a $500 million brownfield project especially when one considers that like most projects, there will be debt involved in this project. Further, do recollect that Sterlite is involved in a bidding war with Grupo Mexico over the bankrupt company ASARCO's copper mine assets. The initial bid of $1.7 billion has now been revised several times by both parties and is unlikely to show any sign of abating.
Sterlite seems to be riding the market wave. The thought process seems to be an opportunistic one. Since the markets are on a bull run and liquidity is ample, Sterlite chooses to raise funds without having any immediate use for those funds. Although the strategy is logical, the market seems to be unhappy with the manner in which the company has handled the communication of this strategy.
Sterlite Industries has over $4 billion as liquid assets on its books as of March 2009. The company is the largest metal producer in India and is the flagship company of Anil Agarwal owned and controlled Vedanta Resource Plc. Vedanta is a FTSE listed company.
Source:
'US Court rejects Sterlite's Asarco bid, clears Grupo's', Economic Times, Sep 2, 2009
Published by Gotham Singhania
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