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Event
Media reports suggest that JSW Steel has emerged the top contender to acquire management control
of Bellary Steel & Alloys Ltd (BASL); with a bid value of Rs2.1bn.
About Bellary Steel:
BSAL is a sick company under the administration of BIFR. It has a steel production capacity of
0.1mtpa and an annual sponge iron production capacity of 60,000 tonnes. The sponge iron and steel
units operated at 34% and 0.2% utilization respectively in FY09. BSAL had a gross block of Rs25.5bn;
mostly relating to 0.5mtpa integrated steel plant (ISP) expansion project.
Apparent issues faced by BSAL
BSAL’s operations appear highly inefficient with a production cost of ~US$500/ tonne in FY09; since
steel production was negligible we assume that these numbers reflect the cost of sponge iron
production. BSAL purchased almost half of its power requirement from the merchant market at
~Rs6.8/ unit in 2009. About 10% of power came from DG sets at an astronomical cost of Rs22/ unit.
The remaining appears to have been supplied by captive power plant with a thermal coal input of
US$100/ tonne. Operations seem to have been also affected by non-availability of working capital.
The company had total debt of Rs32.7bn as of Q2FY11, excluding Rs2.3bn of redeemable preference
shares and acceptances (~Rs1bn as on March 2009). A large part of the debt appears to have been
taken for an expansion-cum-modernization project, which seems to have been stalled due to the
financial crunch. The existing business, meanwhile, seems to be suffering from a lack of working
capital
Integrated Steel plant (ISP) project details
BSAL is setting up a 0.5mtpa steel plant (with a provision to expand it up to 2mtpa) in Bellary for
manufacturing long products, using blast furnace and basic oxygen furnace, with a total capex of
Rs8.9bn. It is also setting up a 1*30MW captive thermal power plant which will meet the complete
power needs of the ISP. The power plant will utilize the blast furnace gas as fuel for its multi-fuel
boilers. Most of the equipment is in place and there has been substantial progress in construction.
BSAL has modernization plans besides the expansion project; it is setting up a 12MW captive power
plant at the sponge iron plant site, which will use as fuel waste heat from the kiln gases as well as burn coal and
agricultural wastes. Part of the project has been completed and commissioned as a 2.5MW plant. The 12MW turbo
generators have also been erected. The company also expects to be allocated captive iron ore mines by the
Karnataka government
Valuations and view
We expect the bid amount to be pumped into BSAL by preferential allotment (not for buying out the existing
promoters). Prima facie it appears that JSW’s bid has a three-fold rationale: a) completion of BSAL’s modernization
project, which, coupled with improvement in utilization levels and easing of working capital, could sharply reduce
cost of operations; b) ensuring financial closure is done for the ISP project; capital work-in-progress relating to the
ISP project currently accounts for over 70% of the balance sheet and is not generating any returns. c) Proposed
allocation of an iron ore mine and land for the expansion project. However, whether the deal makes financial sense
would depend entirely on the amount of haircut banks and financial institutions would be willing to take on
outstanding loans. While further details of the proposed bid are awaited, we are incrementally concerned about the
impact of JSW’s acquisition strategies on its balance sheet, especially as the bid comes close on the heels of the Ispat
Industries buyout. JSW Steel’s consolidated gearing ratio would cross 1.1x after Ispat preferential allotment.
However, we maintain our Outperformer rating on the stock with a price target of Rs1,365/share.
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