Angel Broking neutral on JSW Steel

Angel Broking has maintained neutral rating on JSW Steel in its September 3, 2012 research report. According to research firm, it is challenging to quantify the impact on JSW Steel’s financials given the uncertainty on the timelines and production quantity.

“JSW Steel has announced that it will merge itself with JSW Ispat with a swap ratio of 1:72. The merger will result in cost synergies in terms of lower interest costs, tax benefits and savings in SG&A. However, the debt levels of JSW Steel will rise significantly post the merger. Nevertheless, JSW Steel will be able to expand capacity by 3-4mn tonne at JSW Ispat’s Dolvi unit via brownfield expansion (which requires lower capex compared to greenfield projects). JSW Ispat’s shareholders will receive 1 share of JSW Steel for every 72 shares held resulting in an equity dilution of 8%. Shares of JSW Ispat held by JSW Steel will be cancelled. The merged entity’s steel-making capacity will increase to 14mn tonne from the current 11mn tonne capacity of JSW Steel.” “JSW Ispat has accumulated tax losses of Rs 9700cr which will now benefit the merged company via a lower tax rate. The merger is also expected to lower interest cost of JSW Ispat as being a loss-making entity its interest rate is higher. As per JSW Steel’s management, the merger is expected to generate cost savings of Rs 350-500cr per year due to lower interest cost, better raw material sourcing and lower SG&A costs. Balance sheet of JSW Steel to deteriorate: The net debt (including acceptances) of the merged entity will increase to Rs33,376cr from the current JSW Steel’s debt of Rs24,100cr. Considering the financial position as of June 30, 2012, the merged entity’s proforma net debt (excluding acceptances) to equity would stand at 1.15x compared to 1.09x currently.” “JSW Steel aims to raise utilization levels at its 10mn tonne Vijaynagar plant during 2HY2013 from the current levels of 75%. The Supreme Court has recently allowed 18 mines (category A) to resume iron ore mining in Karnataka after a suspension of over a year on environment concerns. The eventual start-up of production from these mines will be positive as this will result in higher availability of iron ore at slightly lower prices. However, currently it is challenging to quantify the impact on JSW Steel’s financials given the uncertainty on the timelines and production quantity. Hence, we believe increasing steel production beyond current levels would remain a challenge in the near-term. We maintain our neutral view on the stock,” says Angel Broking research report. Non-Institutions holding more than 90% in Indian cos Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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