Sell JSW Steel, target of Rs 600: Nirmal Bang

“JSW Steel has announced the merger of its 47%-owned associate company JSW Ispat with itself, effective 1 July 2012. The company will issue 1 equity share in lieu of 72 equity shares of JSW Ispat. We are surprised about the timing of the merger as JSW Steel maintained in the past that it would turn around JSW Ispat before merging it. But, the merger was a logical event in order to avail the benefit of accumulated tax losses. In a separate set of events, the apex court is likely to give its judgment today on resuming iron ore mining operations in Karnataka. The verdict is likely to be positive, thereby easing the current tight iron ore supply situation in Karnataka.”

“The company has indicated that JSW Ispat’s accumulated losses as per income tax calculations at the end of June 2012 stood at Rs97bn compared to Rs43bn as per reported numbers. This helps the company to achieve tax savings of Rs32bn, although it loses some of the existing Section 80IA benefits to the tune of Rs10bn in the merger process, leading to a net gain of Rs22bn. JSW Ispat’s merger was a logical move, as otherwise a portion of the accumulated losses would have lapsed and it would have taken a longer time to turn profitable at the PAT level, thereby losing the time value of money.  The merger would increase its equity capital from Rs2231mn to Rs2,417mn, a dilution of 7.7% on the expanded capital. It will also issue 485mn 0.01% non- convertible cumulative preference shares in lieu of existing preference shares.”

The company has indicated that JSW Ispat’s accumulated losses as per income tax calculations at the end of June 2012 stood at Rs97bn compared to Rs43bn as per reported numbers. This helps the company to achieve tax savings of Rs32bn, although it loses some of the existing Section 80IA benefits to the tune of Rs10bn in the merger process, leading to a net gain of Rs22bn. JSW Ispat’s merger was a logical move, as otherwise a portion of the accumulated losses would have lapsed and it would have taken a longer time to turn profitable at the PAT level, thereby losing the time value of money.  The merger would increase its equity capital from Rs2231mn to Rs2417mn, a dilution of 7.7% on the expanded capital. It will also issue 485mn 0.01% non- convertible cumulative preference shares in lieu of existing preference shares. We retain our Sell rating on JSW Steel with a revised TP of Rs600,” says Nirmal Bang research report.

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