4 September 2012
Update | Sector: Metals
JSW Steel
BSE SENSEX
S&P CNX
17,384
5,254
CMP: INR670
Merger with JSW Ispat
TP: INR391
Sell
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
JSTL IN
223.1
885/464
-5/-12/-10
149.5
2.7
Synergies in tax, interest cost and operations; Net debt at INR362b;
Reiterate Sell
Valuation summary (INR b)
Y/E March
2012 2013E 2014E
Net Sales
343.7 469.1 493.4
EBITDA
61.0 77.9 77.8
NP
14.8 12.3 12.8
EPS (INR)
66.5 51.1 53.0
EPS Gr.(%)
-11.6
0.6
3.8
BV/Sh.(INR) 750.7 660.7 691.0
P/E (x)
10.1 13.1 12.6
P/BV (x)
0.9
1.0
1.1
EV/Sales (x)
1.2
1.1
1.1
EV/EBITDA (x) 6.8
6.7
6.9
RoE (%)
8.9
7.7
7.8
RoCE (%)
8.7
9.2
8.7
RoIC (%)
11.6 10.4 10.2
Shareholding pattern (%)
As on
Jun-12 Mar-12 Jun-11
Promoter
38.6
38.5
38.3
Dom.Inst.
4.7
4.7
4.8
Foreign
41.3
41.7
45.4
Others
15.3
15.2
11.5
JSW Steel announced the merger with JSW Ispat in swap ratio of 1:72. JSW
Steel already holds 46.7% stake in the latter. The merger will result in issue of
18.6m shares to the minority shareholders of JSW Ispat, expanding the equity
of JSW Steel by 8.3% to 241.7m shares. Post merger, Jindals, Mittals and JFE
will hold 35.1%, 2.8% and 14.9% stake respectively. The merger is expected
to be completed by March 2013.
Post merger, JSW Steel will have a total capacity of 14.3mtpa thus making it
the largest steel producer in the country. Downstream facilities at Vasind,
Tarapur and Kamleshwar with a combined capacity of 1.2mtpa will be spun
off into a wholly-owned subsidiary so that VAT benefits available to Dolvi
HSM (erstwhile JSW Ispat) can still be enjoyed.
It has chosen purchase accounting rather the pooling of interest method,
which will allow revaluation of assets of JSW Ispat and higher net worth for
the combined entity. Apparently, this will result in increase in net worth of
INR38.59b as evident from the gap between the net worth of JSW Steel
merged and networth of individual companies as displayed in its
presentation.
Merger will allow JSW Steel tax benefits from unabsorbed INR97b losses of
JSW Ispat and reduction in interest rate for the latter.
Post merger, JSW Steel plans to leverage the infrastructure of Dolvi unit to
add another 3-4mtpa of capacity through brownfield expansion. Apparently,
JSW Bengal project, if not shelved, is taking a backseat in the overall growth
strategy of JSW Steel due to delays in execution. JSW Steel still talks about
expansion to 40mtpa by 2020.
Pre- and post-merger shareholding pattern
JSW Steel
shares (m)
(%)
85
38.0
36
16.2
0
0.0
0
0.0
102
45.8
223
100.0
JSW Ispat
shares (m)
(%)
0.0
0.0
46.7
19.6
33.6
100.0
JSW Steel merged
shares (m)
(%)
85
35.1
36
14.9
0.0
7
2.8
114
47.1
241.7
100.0
Source: Company, MOSL
Stock performance (1 year)
Jindals
JFE
JSW Steel
Mittals
Public (other)
Total
1,177
494
846
2,517
Our view
Investors are advised to refer
through disclosures made at the end
of the Research Report.
We believe that the merger will result in synergies of operations, taxes and
interest costs. Dolvi unit's infrastructure and its proximity to ports and market
of western India opens up doors to JSW Steel for further growth through
brownfield projects.
1
Sanjay Jain
(Sanjay.Jain@MotilalOswal.com); +91 22 3982 5412
Pavas Pethia
(Pavas.Pethia@MotilalOswal.com); +91 22 3982 5413