 "JSW Steel looking to grow inorganically")
JSW Steel, India's second-largest steel maker in the domestic market, acquired a 50 per cent stake last week in Punjab-based Vallabh Tinplate for Rs 46 crore. This marks its foray into tinplate business. In 2010, it had struck a strategic alliance with debt-ridden Ispat Industries. It acquired a 41 per cent stake in the latter, which had a 3.3-million-tonne capacity and was struggling with debt and losses. The steel company has since merged Ispat Industries with itself to become geographically one of the most diversified steel makers in India.
Analysts say JSW is best placed to scale its business through inorganic means, given its strong balance sheet and high valuations. This is evident from the way the stock has moved compared with peers. In the past year, JSW Steel's stock rose 15 per cent while Tata Steel declined two per cent. Jindal Steel has tumbled 32 per cent in the past year, while the Steel Authority of India has declined 25 per cent.
"Buying a sick unit at a cheaper valuation in times of a downturn, investing some amount to turn round the operations to make it to earnings-accretive, seems to be working," says Giriraj Daga, senior analyst with Nirmal Bang brokerage.
The company concurs. "JSW Steel has a goal to enhance the share of value-added products in its overall product basket to 40 per cent." it said while announcing the stake purchase in Vallabh Tinplate. "Tinplate was the only missing piece in our product portfolio. Through this buy, we will get an entry into a high-value segment, growing fast in India," Seshagiri Rao, JSW Steel's joint managing director and group chief financial officer, has told Business Standard.
Other valued-added products in the JSW portfolio include colour-coated steel and corrugated galvanised steel.
Tata Steel, India's oldest steel maker, offers agriculture equipment, ball bearings, pig-iron, tinplate, cold-rolled steel, structural steel, tubes, wire rod, speciality steel, building components, floor, plates and roof, etc. Analysts say higher presence in differentiated products enables the company to earn higher realisations and improve margins.
Vallabh Tinplate has a 60,000-tonne unit on 10-12 acres. This company is less than a fourth the size of India's largest tinplate company, Tinplate Company of India, a subsidiary of Tata Steel, has a capacity 300,000 tonnes a year.
Taking one-fourth size of Tinplate Company of India, whose capacity is 75,000 tonnes a year, the value of this entity would be Rs 144 crore — as the total enterprise value of Tinplate Company is Rs 576 crore. In such a scenario, a 60,000-tonne unit for Rs 46 crore certainly works out to be a cheaper deal.
"There is potential for expansion at the Vallabh Tinplate unit as there is land available as well. But, we will be focusing on improving quality, ramping up the existing facility," says Rao.
In 2004, JSW Steel acquired loss-making Southern Iron & Steel Company (SISCOL), a maker of long-products used in the automobile sector. JSW Steel subsequently turned round the Salem-based company and more than tripled its capacity to a million tonnes. "Through SISCOL, we entered the long products category. We had no presence in longs till then," says Rao.
The company is following a similar strategy to turn round Ispat Industries' Dolvi unit in Maharashtra. In this regard, JSW Steel has announced expansion of the Dolvi facility to set up a coke oven, a pellet plant and a cold rolling mill.
"These projects were priority to get Ispat on its feet," says the company.
Vardhaman Industries, Vallabh Tinplate's promoter, has been struggling with shrinking a top line for three quarters. The margins in the December quarter have contracted sequentially and year-on-year. The deal with JSW Steel is expected to reverse the trend.
"The partnership between the two is strategic since JSW Steel will be able to enhance its value-added products' portfolio, while Vardhaman will get assured supply of raw material from the steel producer," says a consultant involved in the JSW-Vallabh deal.
Compared to its peers, JSW Steel is better placed to use acquired sick assets to grow its business in India. Tata Steel, the world's seventh-largest steel producing company, is busy turning around operations in Europe and commissioning the first phase of the three-million tonne greenfield unit at Kalinganagar in Odisha.
Government-owned SAIL, which is believed to be conservative, is busy expanding existing facilities. SAIL plans to take its capacity to 24 million tonnes from 17 million now. Similarly, Jindal Steel is expected to double its capacity to eight million tonnes by the end of the current financial year. Jindal Steel & Power's hands are also full with capex.
Strategic experts, however, caution against aggressive mergers and acquisitions. "Given the subdued demand and poor profitability, investment in backward integration and securing raw material makes greater financial sense than increasing capacity through acquisitions," says a consultant involved in the JSW-Vallabh deal. "Capacity has no meaning at a time when there is not enough raw material security to feed the plants," he adds.
Among the leading steel makers, JSW steel has the least access to captive iron and coal mines. To address this, the company is aggressively pursuing London-based Stemcor India asset, which includes a pellet plant and an iron ore mine in Odisha.
JSW Steel currently relies on auctioned iron ore to meet its requirement for the existing steel capacity at Karnataka and at Salem; it also imports coking coal. This exposes the company to the vagaries of international iron ore and coking coal prices, resulting in lower margins compared to integrated companies such as Tata Steel and SAIL.
Analysts want JSW to fix its raw material supply chain first, but given the ambition of Sajjan Jindal, the company can't stay away from its tried-and-tested model of buying good assets at cheaper valuation. And a slowdown deepens the opportunity is likely to grow further.
Analysts say JSW is best placed to scale its business through inorganic means, given its strong balance sheet and high valuations. This is evident from the way the stock has moved compared with peers. In the past year, JSW Steel's stock rose 15 per cent while Tata Steel declined two per cent. Jindal Steel has tumbled 32 per cent in the past year, while the Steel Authority of India has declined 25 per cent.
"Buying a sick unit at a cheaper valuation in times of a downturn, investing some amount to turn round the operations to make it to earnings-accretive, seems to be working," says Giriraj Daga, senior analyst with Nirmal Bang brokerage.
The company concurs. "JSW Steel has a goal to enhance the share of value-added products in its overall product basket to 40 per cent." it said while announcing the stake purchase in Vallabh Tinplate. "Tinplate was the only missing piece in our product portfolio. Through this buy, we will get an entry into a high-value segment, growing fast in India," Seshagiri Rao, JSW Steel's joint managing director and group chief financial officer, has told Business Standard.
Other valued-added products in the JSW portfolio include colour-coated steel and corrugated galvanised steel.
Tata Steel, India's oldest steel maker, offers agriculture equipment, ball bearings, pig-iron, tinplate, cold-rolled steel, structural steel, tubes, wire rod, speciality steel, building components, floor, plates and roof, etc. Analysts say higher presence in differentiated products enables the company to earn higher realisations and improve margins.
Vallabh Tinplate has a 60,000-tonne unit on 10-12 acres. This company is less than a fourth the size of India's largest tinplate company, Tinplate Company of India, a subsidiary of Tata Steel, has a capacity 300,000 tonnes a year.
Taking one-fourth size of Tinplate Company of India, whose capacity is 75,000 tonnes a year, the value of this entity would be Rs 144 crore — as the total enterprise value of Tinplate Company is Rs 576 crore. In such a scenario, a 60,000-tonne unit for Rs 46 crore certainly works out to be a cheaper deal.
"There is potential for expansion at the Vallabh Tinplate unit as there is land available as well. But, we will be focusing on improving quality, ramping up the existing facility," says Rao.
In 2004, JSW Steel acquired loss-making Southern Iron & Steel Company (SISCOL), a maker of long-products used in the automobile sector. JSW Steel subsequently turned round the Salem-based company and more than tripled its capacity to a million tonnes. "Through SISCOL, we entered the long products category. We had no presence in longs till then," says Rao.
The company is following a similar strategy to turn round Ispat Industries' Dolvi unit in Maharashtra. In this regard, JSW Steel has announced expansion of the Dolvi facility to set up a coke oven, a pellet plant and a cold rolling mill.
"These projects were priority to get Ispat on its feet," says the company.
Vardhaman Industries, Vallabh Tinplate's promoter, has been struggling with shrinking a top line for three quarters. The margins in the December quarter have contracted sequentially and year-on-year. The deal with JSW Steel is expected to reverse the trend.
"The partnership between the two is strategic since JSW Steel will be able to enhance its value-added products' portfolio, while Vardhaman will get assured supply of raw material from the steel producer," says a consultant involved in the JSW-Vallabh deal.
Compared to its peers, JSW Steel is better placed to use acquired sick assets to grow its business in India. Tata Steel, the world's seventh-largest steel producing company, is busy turning around operations in Europe and commissioning the first phase of the three-million tonne greenfield unit at Kalinganagar in Odisha.
Government-owned SAIL, which is believed to be conservative, is busy expanding existing facilities. SAIL plans to take its capacity to 24 million tonnes from 17 million now. Similarly, Jindal Steel is expected to double its capacity to eight million tonnes by the end of the current financial year. Jindal Steel & Power's hands are also full with capex.
Strategic experts, however, caution against aggressive mergers and acquisitions. "Given the subdued demand and poor profitability, investment in backward integration and securing raw material makes greater financial sense than increasing capacity through acquisitions," says a consultant involved in the JSW-Vallabh deal. "Capacity has no meaning at a time when there is not enough raw material security to feed the plants," he adds.
Among the leading steel makers, JSW steel has the least access to captive iron and coal mines. To address this, the company is aggressively pursuing London-based Stemcor India asset, which includes a pellet plant and an iron ore mine in Odisha.
JSW Steel currently relies on auctioned iron ore to meet its requirement for the existing steel capacity at Karnataka and at Salem; it also imports coking coal. This exposes the company to the vagaries of international iron ore and coking coal prices, resulting in lower margins compared to integrated companies such as Tata Steel and SAIL.
Analysts want JSW to fix its raw material supply chain first, but given the ambition of Sajjan Jindal, the company can't stay away from its tried-and-tested model of buying good assets at cheaper valuation. And a slowdown deepens the opportunity is likely to grow further.