Mr Prasad Baji of Edelweiss Securities Limited has given following update on JSW Ispat Industries Limited deal
JSW Steel announced that it plans to acquire 41.3% equity in Ispat Industries by investing INR 21.57 billion, implying an enterprise value of INR 123 billion (including preference capital) and equity valuation of INR 52 billion.
Ispat has HRC and downstream flats capacity of 3.3 million tonne per annum and 0.5 million tonnes per annum, respectively. For 12mFY10, Ispat posted revenue, EBITDA and PBT of USD 1,733 million, USD 308 million and USD (-60 million), respectively, with sales volume of 2.6 million tonnes.
Mr Baji wrote in a note that operational improvement and synergy benefits are crucial for turnaround. He said “Ispat achieved EBITDA per tronne of USD 118 in 12mFY10. We expect a combination of cost savings, better realizations and cyclical improvement in steel margins to lead to EBITDA per tonne and EBITDA of USD 175 and USD 525 million, respectively, by FY13E. Such a turnaround would imply EV/EBITDA of 5.2x which is fair but not cheap. Potential cost savings include those on freight, power, VAT and raw material by leveraging JSW’s existing supplier base and upcoming pellet capacity.”
He wrote that debt refinancing planned for Ispat; interest cost could be down 200bps. Mr Baji wrote that “The effective cost of Ispat’s term debt, aggregating INR 67.8 billion, is approximately 12.5%. JSW proposes to refinance this by September 2011, which will bring down interest costs by 200-250bps.”
He added that Ispat plans to undertake CAPEX of INR 31.4 billion over next two years. Mr Baji wrote that “Ispat is planning CAPEX of INR 31.4 billion over the next two years, which includes setting up a 110 MW CPP, 3 million tonne per annum pellet plant, 1 million tonne per annum coke plant and capacity expansion to 4.0 million tonne per annum from the existing 3.3 million tonne per annum. So far, it has spent INR 4 billion. Of the equity infusion of INR 21.57 billion into Ispat, INR 7-8 billion will be the required equity capital for this CAPEX. The remaining CAPEX is likely to be funded through fresh debt of about INR 20 billion over the next two years.”
He concluded that “This acquisition will enable JSW to emerge as India’s largest steel player, at 14.3 million tonne per annum, by early FY12. We believe JSW has the financial strength and operational capabilities to effect the turnaround as mentioned above. However, the issue of increased debt of INR 94 billion would act as a drag. Hence, we do not see upside to our fair valuation of INR 1,372/share. We maintain ‘BUY/Sector Outperformer’ on the stock.”
(Sourced from Edelweiss Securities)
