In an exclusive interview with ET, Sajjan Jindal, chairman of JSW SteelNSE 0.67 %, the largest Indian steelmaker by market capitalization, said that his budget for the alloy-maker may have been just about half of what the European steelmaker is paying.
Going by that valuation yardstick, it might not be incorrect to say that even JSW Steel could be overpaying for Bhushan’s assets.
ArcelorMittal’s bid for Essar Steel’s 10 million tonne (MT) asset values it at Rs 50,000 crore. JSW Steel has offered almost Rs 20,000 crore for Bhushan Power’s 3 MT capacity. Tata Steel paid Rs 35,200 crore for Bhushan SteelNSE 0.50 % and Power’s 5.2 MT capacity.
Analysts believe that all the bidders may have ended up paying more. The steel cycle has reversed over the past few months and this could stretch the balance sheets of the acquirers. Steel prices have corrected more than 15% from their peaks of 2018 and are expected to further fall. According to analysts, fair valuation, given the industry situation and falling earnings, would be 5.5 to 6.5 times EV/EBIDTA, depending on the assets.
As Essar SteelNSE 0.00 % is unlisted, its financials are not publicly available. However, analysts estimate that while acquiring its assets, EBIDTA/ tonne of Rs 7,000- Rs 7,500 must have been assumed. The products are low-value (hot rolled coil) and the iron ore mines are not close to the plants.
Of Essar’s 10 MT, 8.5 MT is fully operational and the remaining 1.5 MT may need some capex. Assuming these calculations, ArcelorMittal has paid 7.8 times EV/EBIDTA, which is expensive in a downcycle. ArcelorMittal’s earnings have dropped to less than a third in just three quarters to $537 million in March.
But analysts also believe that this acquisition would give Arcelor the much-needed meaningful entry into India, justifying the premium. The capacity gives Arcelor a 10% market share.
Tatas considered EBIDTA/tonne of Rs 10,000 for Bhushan, analysts said. This acquisition was valued at 6.8 times EV/EBIDTA, which too appears steep. Bhushan has higher value-added products, mainly for cars. However, it has been affected due to slowdown in auto demand.
JSW Steel may be able to achieve Rs 8,000 per tonne EBIDTA, given proximity of iron ore mines for the 3 MT acquired capacity. Valuation, in this case, comes to 7.7 times EV/ EBIDTA. However, JSW has also got large land parcels, which it could use to expand into the north.
Source: Economic Times