When the Welspun group acquired Grasim Industries Ltd’s Vikram Ispat sponge iron division in 2009, the unit’s operations were suffering from irregular natural gas supplies. In 2014, the unit, now known as Welspun Maxsteel Ltd, still suffers from the same problem.
JSW Steel Ltd is now acquiring Maxsteel to benefit from input cost synergies. It can also fit this acquisition into its proposed steel capacity expansion plans.
JSW Steel is buying Maxsteel for an enterprise value of Rs.1,000 crore plus net current assets, close to the Rs.1,030 crore that Grasim got for this unit. Maxsteel’s latest income statements are not available, but its balance sheet on 31 March shows accumulated losses of Rs.515.5 crore. However, net worth stood at a positive Rs.399 crore.
Maxsteel’s debt stood at Rs.1,087 crore, which doesn’t seem like much, considering JSW Steel’s consolidated debt of Rs.35,870 crore on 30 June. But the acquisition is unlikely to help JSW Steel’s debt-to-equity or profitability ratios.
What does JSW Steel hope to gain from this acquisition? At this point, the objective appears quite modest. JSW Steel says it will supply surplus pellets to Maxsteel, lowering its raw material cost. In turn, Maxsteel will supply part of its sponge iron to JSW Steel’s Dolvi unit, located 40km away, and then become a captive supplier once JSW Steel’s Dolvi unit scales up. It’s not clear how much the company will save through these measures.
But it’s important to note that gas availability is more critical to Maxsteel’s cost of production, and there is little clarity on how that problem can be solved. In fact, JSW Steel’s Dolvi unit is modifying its sponge iron plant to use gas generated from its coke oven. Perhaps, a similar exercise could be carried out at Maxsteel. An Espirito Santo research report says potential synergies seem a bit “rosy” given the gas availability issue.
The Maxsteel plant does come with infrastructure: railway sidings, a captive jetty and 480 acres of vacant land. JSW could use Maxsteel’s facility at some future date to set up a new steel project. Buying this unit with infrastructure and a large piece of land takes care of land acquisition issues, according to the Espirito report. That’s a valid point, given long delays for projects to acquire land and start construction.
Though Maxsteel is making losses, JSW is also experienced in turning around loss-making steel operations; Ispat Industries Ltd is a case in example. Initially, JSW Steel may restrict itself to managing Maxsteel’s current operations and making small investments to improve profitability. Once its steel expansion plans are completed, it may then choose to reveal its hand on how Maxsteel fits into its capacity expansion plans. Since this news has been expected for months now, it did not have much effect on JSW Steel’s share on Tuesday, which closed up by a modest 0.7%.
Source: livemint
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