Way back in December 2010, JSW Steel entered into an agreement with Ispat Industries Ltd to acquire 41.4% stake in Ispat at a price of Rs 19.85 per share for Rs 2,157 crore on a preferential basis. The funds were mainly used to improve the liquidity in the company and reduce the debt. Later on, JSW increased its stake to 46.75 per cent in JSW Ispat by acquiring 8,99,40,890 shares and became the single-largest shareholder of ISPAT.
In June 2012, JSW Steel completed the merger of JSW Ispat with itself. As per the merger scheme, shareholders of JSW Ispat would get one JSW Steel share for every 72 shares they hold. Post-merger, JSW Steel promoters had 35% stake in the company. Through a merger, JSW Steel was aiming at various benefits, including synergy in operations and reducing the borrowing cost of JSW Ispat.
Looking Back: WHAT CONVINCED JSW STEEL?
JSW Steel’s move to acquire Ispat Industries is a win-win deal for both the companies. The positives that persuaded JSW Steel to go ahead with the acquisition of Ispat include:
- JSW will get to consolidate its position in the domestic steel manufacturing industry and emerge as the largest steel producer with a total capacity of 14.2 million tonnes per annum (MTPA) and achieve significant benefits in terms of raw material RM negotiation, economies of scale, better access to bulks import and finished steel exports.
- The deal will bring significant advantages, particularly in alternative steelmaking technologies and house multiple modern steel-making technologies under one roof enabling flexible production processes.
- The deal will bring in opportunities to leverage on each other’s marketing and distribution platforms to expand market reach. Moreover, it will help reduce marketing, general and administration overheads via better utilization of infrastructure and elimination of redundancies.
- The 3.3 MTPA integrated steel plant at Dolvi is advantageously located on the western coast of Maharashtra. The plant is located in a close proximity to a port which can handle cargo of up to 10 MTPA. It will also provide the unit with logistical advantages in importing raw materials and savings on freight cost.
- The deal ensures de-risking of JSW Steel’s single location upstream profile. Post-merger, the company can focus more on high-end value added and downstream products which will help in brownfield expansion.
- The deal will result in considerable financial benefits to JSW Steel. Realize significant financial benefits via accelerated utilization of unabsorbed tax losses at JSW Ispat as well as optimal use of depreciation on further capital investments. As on Sep 2012, ISPAT had an accumulated loss of Rs 97 billion, on which the company would get deferred tax benefit besides making optimal use of depreciation on further capital investments. (Source: Emkay Global report dated Sept 02, 2012)
- Ispat can benefit from sourcing key raw materials such as coking coal, pellet, power and iron ore from the JSW group at relatively low rates rather than depending on higher cost of imports thereby reducing its operating costs substantially
- Entry of a large strategic investor into ISPAT will strengthen its balance sheet and enable productive utilization of its capacity, which protects the interests of lenders and enhances value for other stakeholders. In addition to this, infusion of equity from JSW and successful refinancing debt of ISPAT will result in bringing down its financial stress which would give comfort to the lenders.
- Post-merger, JSWL will take several measures to Improve JSW Ispat’s cost structure via faster implementation of several plant integration initiatives. Margin expansion can be possible through improved capacity utilisation and cost reduction initiatives.
JSW Steel has a proven track record of acquiring troubled assets and turning them around in record time by closely integrating them with its existing operations thus creating synergies and optimizing cost.
The Dolvi plant of the erstwhile Ispat Industries, which had a negative earnings before interest, tax, depreciation, amortisation (EBITDA) of Rs 77 crore at the time of acquisition in 2010, saw the operating profit turn positive to Rs 1,180 crore by end of March 2013, following reduction in power cost, gas requirements, and many other measures.
Backward integration and cost reduction measures undertaken by JSW for Ispat turnaround
Ispat integration resulting in better product mix, enhanced customer base
Share of value added products in product portfolio increased to 38% in FY15
Dolvi plant capacity enhanced from 3.3 MPTA to 5 MTPA.
JSW mainly used internal acrruals, debt funding and equity funding via SPV route for capacity expansion.
In Aug 2011, JSW completed the Rs 6,000 crore debt refinancing deal for JSW Ispat.
Post Merger with ISPAT, JSW deleveraged its balance sheet & prepaid part of rupee borrowings
JSW net cash flow has seen CAGR growth of 12.1% over last 5 years
Market cap of JSW has seen CAGR growth of 11% over last 4 years as against negative growth of its peers including Tata steel, Vedanta and SAIL.
DRIVERS FOR TURNAROUND
With Ispat’s losses mounting – the company slumped to a net loss of 1,806 crores in March 2011 and loss of Rs 308.57 crore in December 2011. JSW then drew up a Rs 3, 000-crore plan to turn the clock back at ISPAT and funds were utilized to set up a coke oven, a pellet plant and a cold rolling mill. The fund injection through the equity route was in a special purpose vehicle (SPV) and was part of a strategy to make the Dolvi unit cost-effective.
Under the turnaround plan, JSW invested Rs 700 crore as equity in Amba Coke, an SPV that will sell coke and pellets to Ispat. The SPV raised Rs 1,300 crore in debt, insulating JSW from any future concerns on account of Ispat. The coke oven and pellet plants improved profitability and resulted in increasing the share of value added products from 10% to over 30% FY14 and FY15.
In Aug 2011, JSW completed the Rs 6,000-crore debt refinancing deal for Ispat which enabled Ispat to come out of the corporate debt restructuring process. The earlier loans to Ispat were between 14 -19% and the new loan terms with the average interest rate for the refinance was 11.75% resulting in cost savings to Ispat.
JSWL also deleveraged balance sheet post-merger. Reduced interest payments by prepaying part of the rupee borrowings and refinanced working capital borrowings enabled JSWL to save interest costs. In October 2014, to refinance a part of its rupee debt, JSW Steel raised $500 million (about Rs 3,000 crore) through a bond sale to overseas investors. With a tenure of five years, the bonds carry a coupon rate of 4.75%
The debt refinancing measures are likely to continue in near future as well to optimise JSW’s capital structure and reduce its weighted average cost of capital.
BACKWARD INTEGRATION AND COST REDUCTION INITIATIVES
Prior to the acquisition, profitability at Ispat was being impacted due to the absence of captive power as well as being dependent on imported coal and iron ore, the prices of which continued to rise. Ispat’s Dolvi is one of the most technologically advanced units in the country. However, lack of coke oven battery, pellet and power plant had made sure the company suffers losses.
Post-merger, to achieve cost leadership through backward integration the following measures were undertaken by JSW Steel during last 3 years (FY 2012- 15):
- Commissioned 1.0 MTPA capacity and a pellet plant of 4 MTPA capacity at the Dolvi steel complex to protect Ispat from market risks in sourcing quality coke and pellets for its steel-making operations. Ispat saved on raw material cost with the commissioning of the new plant, as it manufactured coke and pellets in its plant rather than purchasing it from outside. The total planned investment in the project is Rs 1,875 crore.
- Secured power requirements for Dolvi facility and supplied finished products to high demand areas. JSWL tied up with JSW Energy to provide significant power savings through the synergies gained, which was a win-win situation for both the companies.
- Increased supply of finished goods to the customer within Maharashtra because of benefits from lower freight as compared to Vijaynagar. Both companies compete in the same market—JSW supply to Maharashtra and Ispat supply to the South. JSWL decided that Ispat will move its steel only within a 200km (radius), which will help it cut freight to Rs 325 per tonne from Rs 1,400 per tonne, a straight saving of Rs 1,100 crore per tonne.
- Commissioned waste gas-based 55MW power plant and 600 TDP line calcining plant for captive consumption and installed a railway siding project for easy movement of raw material and finished goods to achieve lower logistic costs.
- Established a 0.8 million TPA cold-rolling facility at the Dolvi steel complex to augment JISL’s efforts to capture downstream opportunities.
Acquiring Ispat allowed JSW steel to increase its share of high-end value added and upstream products and have a well-diversified portfolio. The increase in value-added products lead to incremental growth in focus sectors and also helped in import substitution. Additionally, alignment of marketing strategies resulted in freight synergies and VAT benefits. Marketing strategies have been reworked leading to freight synergies and better realizations.
JSW’s value-added portfolio includes HRPO, CRCA, galvanised, colour coated, electrical steel and specialised rolled longs. During the year, volumes of the value-added and special steel products segment grew by 38% as compared to 33% of total sales in FY14.
The contribution of value added products to the total sales has increased from 24% in FY14 to 33% in FY15. Ispat had 10% share of value-added products prior to the deal in FY 2010.
|Consolidated Income statement – JSW Steel Ltd|
|YoY Growth (%)||43.0%||11.6%||32.3%||3.3%|
|YoY Growth (%)||25.3%||6.6%||40.9%||2.6%|
|Depreciation & Amort.||1,560||1,933||2,237||3,183||3,434||21.8%|
|YoY Growth (%)||26.0%||2.3%||40.2%||-0.3%|
|Finance cost ||1,060||1,427||1,967||3,048||3,493||34.7%|
|YoY Growth (%)||34.6%||37.8%||54.9%||14.6%|
|YoY Growth (%)||-18.2%||0.3%||-34.6%||94.1%|
|Provision for Tax ||779||500||845||920||819||1.3%|
|YoY Growth (%)||-35.8%||69.0%||8.9%||-10.9%|
|Net Profit ||1,754||538||963||452||1,797||0.6%|
|YoY Growth (%)||-69.3%||79.1%||-53.1%||297.5%|
|Cash flow earnings ||3,314||2,471||3,201||3,635||5,231||12.1%|
|YoY Growth (%)||-25.4%||29.5%||13.6%||43.9%|
|Financial Year ended March (Figures in INR Cr) (Source: JSW Steel Annual Report 2014-15 )|
|Valuation Multiples -JSW Steel Ltd |
|Market price Per Share ||916||721||672||1,036||907|
|Earnings per share (Diluted)||84||23||42||17||73|
|Market Cap (Crores)||20,444||16,097||15,001||25,044||21,913|
|Total Debt (Cores)||16,476||19,909||21,346||34,762||37,990|
|Net Debt (Crores)||14,159||16,644||19,533||34,014||35,808|
|Equity Capital ||223||223||223||242||242|
|Reserves & Surplus||15,437||16,186||16,781||20,871||21,987|
|Enterprise Value( Crores)||34,603||32,741||34,534||59,057||57,721|
|Operating EBIDTA Margin (%)||20||18||17||18||18|
|EV/ Sales (X)|| 1.5|| 1.0|| 0.9|| 1.2|| 1.1|
|EV/ EBITDA (X)|| 7.1|| 5.4|| 5.3|| 6.4|| 6.1|
|P/E (X)|| 10.9|| 31.9|| 16.1|| 59.9|| 12.4|
|Debt / Equity (X)|| 1.0|| 1.2|| 1.2|| 1.6|| 1.6|
|Debt / EBITDA (X)|| 3.4|| 3.3|| 3.3|| 3.8|| 4.0|
|Net Debt / EBITDA (X)|| 2.9|| 2.7|| 3.0|| 3.7|| 3.8|
|EBIT / interest (x)|| 3.1|| 2.9|| 2.2|| 2.0|| 1.7|
|(Source: JSW Steel Annual Report 2014-15 )|
|Product Portfolio – JSWL |
|Source: JSW Annual Report FY15|
|Comparable Market Capitalisation (Figures in INR Crore)|
|FY12||FY13||FY14 ||FY15||CAGR |
|Tata Steel ||41,596||41,125||38,786||24,916||-15.7%|
|JSW Steel ||16,097||15,001||25,044||21,913||10.8%|
|Vedanta Limited ||57,884||59,840||63,472||25,940||-23.5%|
|Capacity Expansion at JSWL |
|Particulars ||FY02||FY10||FY14||Q3 FY16||FY17E|
|Other JSW Plants ||1.6||7.8||11.0||11.0||13|
|Dolvi Plant (ISPAT )||3.3||5.0||5|
|Technology||Corex||Crex, BF||Corex, BF, DRI||Corex, BF, DRI|
|Product Mix||Flats||Flats, Long, special steel, value added||HR, CR, galvanized, pre-painted, TMT bars, wire rods, special steel bars, tinplates, rounds and blooms||HR, CR, galvanized, pre-painted, TMT bars, wire rods, special steel bars, tinplates, rounds and blooms|
|Source: JSW Investor Presentation / Press release|
- JSW enhanced capacity of Dolvi plant from 3.3 MPTA to 5 MTPA in FY16.
- Developed new products capturing niche markets including:
- Automotive Grade steel – Enhanced focus on cold rolled, galvanised and galvanneal products for body panels of automobiles
- Colour Coated Products – State-of-the-art colour coating line for appliance grade products used in consumer durables
- Electrical steel – Establishing Cold Rolled Non-grain Oriented (CRNO) steel plant to address domestic demand by substituting imports of high-grade electrical steel
- Share of value added products in product portfolio increased to 38% in FY15
- EBITDA margins have been around 18% for the last 3 years. Better diversifying the product portfolio, increasing the share of value added products, enhanced customer base and cost reduction measures were undertaken for ISPAT turnaround by JSWL are some of the factors which are likely to lead to margin expansion in future.
- D/E of JSWSL have increased to 1.6x in FY15 from 1.0x in FY11 mainly on account of debt-funded investment in an expansion of steelmaking capacities including planned Dolvi expansion and higher working capital requirements due to increased volumes.
JSW net cash flow has seen CAGR growth of 12.1% over last 5 years despite net profits seeing only CAGR growth of 0.5%.
MAJOR ONGOING PROJECT
Capacity expansion at Vijaynagar works from 10 MTPA to 12 MTPA by setting up certain new facilities and debottlenecking/ modification of existing facilities
2 MTPA non-grain oriented Eelectrical steel project
50,000 TPA capacity service center to handle the products of Electrical Steel Complex
The acquisition is positive for JSW Steel in the long run. With Dolvi plant’s capacity enhanced to 5 MPTA, JSW steel now has an integrated manufacturing facility to enrich its product portfolio and can fully leverage on opportunities available in the automobile, consumer durables and construction sectors in future. For JSW, having higher technological competence, increasing share of value-added products across the country are some of the factors which will lead to operational improvements in the future.