Analysts gave a thumbs-up to JSW Steel's acquisition of smaller rival Welspun Maxsteel for an "enterprise value of Rs 1,000 crore plus net current assets," saying the deal not only gives the Sajjan Jindal-led company a secure source of sponge iron, but also access to a vast land bank. JSW SteelBSE 0.26 % will get a captive jetty, along with 480 acres of vacant land. ET reported on the deal in its 10th June edition.
Welspun Maxsteel, a subsidiary of Welspun CorpBSE 4.79 %, makes sponge iron, which is used to make steel in an electric arc furnace. WMSL has an installed capacity of 0.9 MTPA gas based DRI plant, with a captive jetty and a captive railway siding.
DRI plant is located in Salav village in Raigad district of Maharashtra. Captive jetty has an existing capacity of 2.5 MTPA which is located at 1.8 km from the plant, while the captive railway siding is located at Roha junction on national Konkan Railway, 35 km from the DRI plant. JSW Steel's Dolvi plant, which is close to Welspun Maxsteel's loss-making plant in Maharashtra, currently buys sponge iron from Welspun Maxsteel.
Seshagiri Rao, Joint MD & Group CFO in a statement called it a "value accretive" acquisition for JSW Steel. It will have "synergies in supplying surplus pellets to Welspun MaxSteel and use of DRI from WMSL in company's steel-making operations at Dolvi plant," Rao added.
Analysts say the key benefit of acquiring Welspun Maxsteel is the about 480 acres of land that comes along with the plant. The land can be used to expand the current sponge iron facility as well as set up an integrated steel plant.
"It is not only the asset, JSW Steel is looking at scalability. It has land and is a port-based plant," said Giriraj Daga, an analyst with Nirmal Bang. "JSW Steel can expand its downstream operation. They can build a blast furnace to make steel out of iron ore and coke or build an electric arc furnace to make steel out of sponge iron.
There are other synergies too. JSW has surplus pellets in its subsidiary Amba River Coke Limited which will be supplied to Welspun Maxsteel. The cost of production in Welspun Maxsteel will come down due to replacement of significant portion of its bought-out pellets with captive pellets. The DRI produced by Welspun shall initially be used partly by JSW's Dolvi unit, and would be consumed in the entirety post completion of its ongoing expansion to 5 MTPA.
JSW Steel is going to spend $22 billion in the next ten years to take its steelmaking capacity to 40 million tonnes (MT) per annum till 2025, through organic as well as inorganic route. It currently has a capacity to make 14.3 million tonnes per annum, with plants at Karnataka, Tamil Nadu and Maharashtra.
JSW SteelBSE 0.05 % is already in the process of expanding Dolvi plant's capacity to 5 MT from 3.3 MT. The Dolvi plant was earlier a loss-making unit of acquired Ispat Industries 2012. "The deal is not just about steel, but about the land available. Today acquiring land is very difficult and the deal is positive for JSW Steel," said Goutam Chakraborty, an analyst with Emkay. "Going ahead they can set up a brownfield project. JSW Steel had said earlier that it wants to grow its long steel market in the western region."
JSW Steel, which is mainly into flat steel products, wants to expand its long steel products. While flat steel is used in automotive and white goods segment, long steel is used in real estate and infrastructure segments.
The Welspun Maxsteel acquisition and the land coming along with it will help the company do that, according to analysts. Analysts are not too worried about high debt at JSW Steel and Welspun Maxsteel's loss-making operations, saying the deal is a distress sale by Welspun CorpBSE 4.79 % and is coming at a reasonable price.
JSW Steel will also be taking over Welspun Maxsteel's 1,030 crore debt. According to Edelweiss, the likely deal is at 20-40% discount to the replacement cost. The brokerage, however, mentioned that unavailability of gas, on which the plant runs, could pose some turnaround challenges.
Source: ET
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