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JSW Ispat Steel Ltd. – The new set up
JSW Steel is set to acquire controlling stake in 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.)
Out of the total cash infusion of `2,157cr by JSW Steel, `700cr–800cr will be used
to fund Ispat’s capex plan of `3,140cr and the balance would be used to meet the
company’s working capital needs. 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.
Our view
We believe the acquisition is positive for JSW Steel in the long term. Post the
acquisition, JSW Steel will have access to Ispat’s 3.3mn tonne capacity and will
become India’s largest steel company with a total capacity of 14.3mn tonnes
(Greenfield projects are 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.
Currently the stock is trading at 8.6x FY2011E and 6.0x FY2012E EV/EBITDA.
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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