Ispat acquisition: To accelerate volume growth - PINC Event Update

JSW Steel has proposed to acquire, subject to approvals, 41.3% stake (post full dilution) in Maharashtra-based Ispat Industries by equity infusion of Rs21.6bn. Mandatory open offer to minority shareholders would follow. With this acquisition, JSW's capacity in India would increase to 11.1mntpa, and is set to reach 14.3mn tpa by FY11-end with commissioning of 3.2mn tpa brownfield expansion in Karnataka.

Key highlights

- Valuation attractive: Replacement cost of ~USD720/t vs. capex of USD800-USD1,200/t to set up new capacity, while reducing “go to market” time by 3-4 yrs.

- Product profile: Ispat has integrated steel capacity of 3.3mn tpa at Dolvi near Mumbai, with 10% share of value-added products.

- Financial concerns to ease: Equity infusion would help in bringing down net D/E from ~20x pre-deal to 1.8x post-deal. We believe that this will help in reducing Ispat's cost of debt (~15% compared to ~7.5% for JSW).

- Scope for margin expansion: We believe that margin expansion in Ispat is possible through better capacity utilisation and cost reduction.

- Accumulated losses in Ispat to provide tax-benefit going forward.

Outlook and Recommendation

We believe that Ispat acquisition is attractive on replacement cost basis and is in line with JSW's strategy of volume-led growth. Further, we opine that margin expansion in Ispat led by better utilisation, rationalisation of iron ore, power cost and reduction in financial burden (both quantum and cost of debt to reduce) would help in Ispat's turnaround. Pending open offer and further details, we have valued JSW's 41.3% stake in Ispat at Rs25.2bn using equity method. At CMP of Rs1,186, JSW is valued at 5.8x FY12E EV/EBITDA. Maintain 'BUY' on JSW Steel with a revised target price of Rs1,362 (JSW steel @ 6x EV/EBITDA, Ispat Inds @ 5x EV/EBITDA).

Source : Equity Bulls

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