Sell JSW Steel; target of Rs 391: Motilal Oswal

“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. 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.”

“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. We continue to admire the execution skills and operational efficiencies of JSW Steel. We will be more comfortable if JSW Steel rejigs its strategy to focus on deleveraging rather than pursuing aggressive growth. Stock is trading at expensive FY14 valuation of 6.9x EV/EBITDA and 12.6x P/E. Re-iterate sell,” says Motilal Oswal research report.

Institutional holding more than 40% in Indian cos

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