Credit Suisse in a report dated 6th July 2012 stated that JSW Steel understated FY12 net debt by at least Rs 11,900 crore. The company stated debt stood at Rs 16,600 crore for FY 2012. Creidt Suisse arrived at the figure based on following three reasons:
1. Acceptances of Rs 75 bn (up from Rs68 bn in FY11) are effectively debt
2. Securitised receivables of Rs 31 bn (up from Rs26bn); and
3. Rs12 bn from the fall in INR; un-hedged liabilities are now $3 bn.
Steel industry is mainly valued on EV/EBIDTA basis and such latent debt of almost 70 percent of the stated debt in annual report certainly makes the valuation expensive especially for JSW steel. The stock is expected to remain under pressure and hence a good short term trading opportunity is visible. Instead of shorting the stock directly in futures one can sell 780 call of JSW Steel at the current market premium of Rs 5.
Total return from the strategyAssuming 1 lot of JSW Steel (1 lot = 500) is sold at Rs 5.00
Total premium collected = 500 * 5 = Rs 2500
Total Transaction cost assuming Brokerage cost including STT and other taxes at Rs. 50 per lot = Rs 50
Margin money required: Rs. 54,600
Total return = 2450 / 54,600 = 4.5 % in 20 days
Risk: If JSW Steel moves past 785 and closes above this level then there will be a loss of Rs.500 for every point above 785.