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JSW Steel buys controlling stake in Ispat Industries
JSW Steel will buy 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.)
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. Ispat’s capex of `3,140cr (`400cr has already been spent) entails
setting up of 110MW power plant (`490cr), 3mn tonne pellet plant (`600cr), 1mn tonne
coke oven plant (`500cr), increasing capacity from 3.3mn tonnes to 4mn tonnes
(`1,418cr) and cost-saving programme (`132cr). Further, JSW Steel will refinance the
outstanding debt on Ispat books by September 2011. Currently, the average interest cost is
10% and JSW Steel’s management 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 nonintegrated
setup, where it buys expensive power and iron ore/pellets and imports coke.
JSW Steel’s management expects operational synergies on account of the following factors:
• Power: JSW Steel plans to source power from JSW Energy at `4.5/unit as against
Ispat’s current power purchase at `5.95/unit.
• Imported coke: Ispat currently imports coke from China, which will now be
provided by Jindal Stainless, accounting for nearly 35% of Ispat’s annual
requirement, leading to freight savings.
• Pellets: Ispat currently imports pellets from Bahrain at ~`9,500/tonne. JSW Steel
will commence its coke oven plant in April 2011 and will have excess capacity of
2mn tonnes, which can be sold to Ispat, thus leading to cost savings of
~`1,000/tonne.
• Iron ore: JSW Steel plans to source low-cost iron ore from Karnataka (Bellary
region), replacing the high-cost ore from NMDC mines.
• VAT benefit: JSW Steel plans to sell 100% of the output in the Maharashtra region
to avail VAT benefit of `1,300/tonne applicable till 2012.
We believe the acquisition is positive for JSW Steel in the long term, as it will become
India’s largest steel company with a total capacity of 14.3mn tonnes (Greenfield projects
have been difficult to implement because of land acquisition/environmental clearance
issues). With operational synergies expected to accrue in FY2012, Ispat is likely to post
positive EBITDA/tonne of US $50. Moreover, as and when capex projects are completed,
EBITDA/tonne is likely to increase to US $100/tonne. We maintain Buy on the stock with a
Target Price of `1,310.
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