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JSW Steel is set to acquire controlling stake in Ispat Industries (Ispat) through fresh
issuance of 108.6cr equity shares for `2,157cr (acquisition price: `19.85/share).
Post the completion of the acquisition (subject to approval by shareholders and
lenders), JSW Steel will hold 41.29% of expanded equity and Ispat’s existing
promoters will hold 26%. Further, JSW Steel will make open offer for an
additional 20% stake, which is expected in February 2011. (Note: Stemcore will
not have any participation in the new set up.)
What the deal will carry: The deal will help in the timely execution of Ispat’s capex
plan of `3,140cr (`400cr has already been spent) as funding issues are mitigated
given JSW Steel’s strong credentials. JSW Steel will also refinance the outstanding
debt on Ispat’s books by September 2011. Currently, the average interest cost is
10% and JSW Steel expects to refinance the debt at a lower interest cost. Ispat has
been incurring losses (`77cr loss at EBITDA level in 1QFY2011) due to its
non-integrated setup, where it buys expensive power and iron ore/pellets and
imports coke. Post the acquisition, JSW Steel will focus on operational synergies
by a) buying power from JSW Energy at `4.5/unit (current cost: `5.95/unit),
b) purchasing coke from Jindal Stainless, replacing imported coke from China,
c) selling excess pellets to Ispat from its pellet plant (to be commissioned in April
2011), d) sourcing low-cost iron ore from Karnataka, replacing the high-cost ore
from NMDC mines and e) selling 100% output in Maharashtra to avail freight
and VAT benefit of `1,300/tonne.
Our view: We believe the acquisition is positive for JSW Steel in the long term, as
it will become India’s largest steel company with total capacity of 14.3mn tonnes
(Greenfield projects have been difficult to implement because of land
acquisition/environmental clearance issues). Further, Ispat is likely to post positive
EBITDA/tonne of US $50, with operational synergies expected to accrue in
FY2012. EBITDA/tonne is further likely to increase to US $100–125, as and when
capex projects are completed. We maintain Accumulate on the stock with a
Target Price of `1,310, valuing it at 6.5x FY2012E EV/EBITDA.
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