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Acquires 41% stake in Ispat at INR 21.6 bn
JSW Steel (JSW) is acquiring 41% stake in Ispat Industries (Ispat) for INR 21.57 bn by subscribing to 1,087 mn fresh equity shares. The enterprise value and equity valuation post transaction are INR 11.5 bn and INR 52.6 bn, respectively. Ispat has a 3.3 mtpa—DRI (1.6 mtpa), BF (2 mtpa), HRC (3.3 mtpa)—capacity plant near Mumbai and CR-GP/GC-colour-coated sheets capacity of ~0.5 mt at Nagpur in Maharashtra. For 12mFY10, Ispat posted revenue, EBITDA, and PBT of USD 1,733 mn, USD 308 mn, and a loss of USD 60 mn, respectively, with volume of 2.6 mt. Operational inefficiencies and high debt (total INR 86 bn) were primary reasons behind weak earnings.
n Operational improvement and synergy benefits crucial for turnaround
On an annual basis, Ispat achieved EBITDA/t of ~ USD 100 in 12mFY10. We expect a combination of cost savings and better realisations (Ispat was selling some products at discount) could lead to EBITDA/t of USD 175 by FY13E. We estimate total EBITDA at ~USD 525 mn at that stage leading to transaction EV/EBITDA of ~4.9x. Potential cost savings include those on freight, power, VAT, and raw material (leveraging JSW’s existing supplier base). On EV/t basis, the acquisition valuation works out to USD 770/t, a significant discount to replacement cost of USD 1,000/t. JSW will be required to make an open offer for 20% stake.
n Set to become India’s largest steel company in FY12
Post this acquisition and completion of its 3.2 mtpa expansion in March 2011, JSW’s capacity will leapfrog from 7.8 mtpa to 14.3 mtpa, making it India’s largest steel company. Additional capex of INR 39 bn at Ispat can further add 0.9 mtpa capacity.
n Our view: High potential; execution needs monitoring; maintain ‘BUY’
We believe the Ispat acquisition is operationally positive considering benefits of scale and the turnaround possible due to efficiency improvement, financial strength, and better management that JSW brings to the table. An effective turnaround implies EV/EBITDA of 4.9x for the transaction, which is reasonable. Near term issues will be increase in debt for JSW, leading to debt:equity of 1.1x (at full consolidation). We will release a more detailed note post the analyst meet today. We have a ‘BUY/Sector Outperformer’ recommendation/rating on the stock with a fair valuation of INR 1,372/share.
