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Brazil-based Vale, the world’s top iron-ore manufacturer, has raised iron-ore prices by 65% in its agreement with Korean and Japanese steel makers for 2008, setting the benchmark for global iron-ore prices.

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Brazil-based Vale, the world’s top iron-ore manufacturer, has raised iron-ore prices by 65% in its agreement with Korean and Japanese steel makers for 2008, setting the benchmark for global iron-ore prices.

Nearer home, the Union ministry of mines has approved a price hike of 40-50% in iron-ore prices from April.

This augurs well for iron-ore players like Sesa Goa, whose stock has appreciated by 72.8% in the past one year.

The developments automatically impact steel prices, pushing them higher. Integrated (having captive iron ore mines) companies like SAIL and Tata Steel will benefit the most from the hike in iron ore prices, as the increase in steel prices will directly contribute to their profitability.

Steel prices have already increased by around Rs3,000 per tonne since January. Analysts see a further hike should a hike in iron ore prices take effect in April.

Post acquisition of London-based Corus, Tata Steel derives a major share of its revenues from the overseas market where prices are higher. Corus buys primary steel to manufacture finished products. Thanks to its large size, the company enjoys the economies of scale and some pricing power.

Analysts see the financials of Tata Steel improving in the next 3-6 months due to a substantial decline in costs.

The stocks of Tata Steel and SAIL have increased by 96.8% and 93.8%, respectively in the past one year. The two companies have also formed a 50:50 joint venture firm to develop coal mines in India. This augurs well for them as coking coal prices have shot up lately on account of supply constraints globally. A hike in coking coal prices, however, is likely to offset some of the gains from higher steel prices driven by the increase in iron-ore prices.

The profit margins of non-integrated players like Ispat, Jindal and Essar (delisted) will, however, be adversely hit.

Steel finds application in the auto, roads, construction and consumer durables industries. Though auto is currently in a bearish phase, the demand for steel looks robust, at least for the next 6-12 months.

Demerger driver

Not so long ago, research and development (R&D) was viewed as a cost centre rather than a cash cow. But, times have changed now, with companies realising the value-unlocking possibility offered by a hive-off of R&D into a separate entity.

Sun Pharmaceutical and Nicholas Piramal have already hived off their R&D units into separate companies, and on Tuesday, Ranbaxy’s board approved the demerger of its new drug discovery research (NDDR) unit into a subsidiary, Ranbaxy Life Science Research (RLSRL).

The move results in a cost saving for Ranbaxy even as there is a value assignment for the demerged entity. It also cuts out the risks associated with R&D for the parent.

As per the scheme of demerger approved, Ranbaxy shareholders will receive one share of Re1 each of RLSRL, without any payment, for every four shares of Rs5 each held in Ranbaxy, as on the record date.

All assets and liabilities along with research personnel and pipeline of the NDDR unit will stand transferred when the scheme comes into effect on January 1, 2008.

Post-demerger, the equity capital of RLSRL will be about Rs12.6 crore. As per the scheme, Ranbaxy and RLSRL Employees Welfare Fund Trust will hold 19.8% and 4.9%, respectively of the equity share capital of RLSRL and the balance will be held by the shareholders of Ranbaxy.

Ranbaxy has subscribed to redeemable preference shares of RLSRL aggregating Rs200 crore to meet its business needs.

While prima facie the valuation of Nicholas Piramal India Ltd (NPIL) demerger, which had a ratio of 1:10 (one equity share of Rs10 of NPIL Research and Development Ltd credited as fully paid up to be allotted for every 10 equity shares of Rs2 each held in NPIL as on the record date), looks more attractive, it is too early to comment on valuations as Ranbaxy’s pipeline has not been disclosed.

At the current market price of Rs412.20, the stock is available at 21.5x its CY07 annualised earnings. Investors can take a call when there is more clarity on Ranbaxy’s pipeline.

Pallavi Pengonda (p_pallavi@dnaindia.net) & Sunder Subramanian

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