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Buys controlling stake in Ispat
JSW Ispat Steel Ltd. - The new set up: 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: 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.
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
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 cost of
`5.95/unit.
Imported coke: Ispat currently imports coke from China.
However, post the acquisition, coke will be provided by Jindal
Stainless, which will account for nearly 35% of Ispat's annual
requirement. (Coke yield will be 100% as against 93% yield
from imported coke).
Pellets: Ispat currently imports pellets from Bahrain at
~`9,500/tonne. JSW Steel will commence its pellet plant in
April 2011 and have excess capacity of 2mn tonnes, which can
be sold to Ispat.
Event Update
Iron ore: JSW Steel plans to source low-cost iron ore from
Karnataka (Bellary region), replacing the high-cost ore from
NMDC mines.
VAT and freight benefits: JSW Steel will make arrangements
to sell 100% of Ispat's output in Maharashtra, thus enjoying
freight and VAT benefit of `1,300/tonne. The VAT benefit is
applicable until 2012 and can further be extended by seven
years as per the provisions of the law.
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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