Using geography, JSW Steel plans to turn Ispat around

It was succour finally for the debt-ridden Ispat Industries and its promoters, the Mittal family — who have been chased by lenders for years now — as the Sajjan Jindal-controlled JSW Steel on Monday acquired 41.29% stake in the company.

The deal, which will be followed by a preferential allotment of equity shares to JSW, will see an immediate equity infusion of Rs2,157 crore into Ispat Industries.

“This will mainly be used to improve the liquidity in the company and reduce the debt burden,” said Sajjan Jindal, vice-chairman of the diversified JSW Group.

According to the terms of the deal, Ispat Industries will issue 108.66 crore equity shares on a preferential basis at Rs19.85 per share for a consideration of Rs2,157 crore.

This will be later followed by an open offer by JSW to the minority shareholders of Ispat Industries.

Post the allotment, while JSW Steel will be holding 41.29% stake in the 3.4 million tonne steel maker, the promoters, led by Pramod Mittal and younger brother Vinod Mittal, will hold 26% stake.

Jindal said as per the agreement with the aggrieved lenders of the company, JSW Steel will refinance the entire debt of Ispat Industries before September 2011.

“In the next six to nine months, we will take out the existing lenders and refinance the debt with a new set of lenders at interest rates that are 4 percentage points less than the prevailing rates,” Jindal said.

Currently, Ispat pays an average weighted interest rate of 9.9% on its net debt of Rs7,500 crore and a working capital debt of Rs2,500 crore.

While IDBI Bank, ICICI Bank and IFCI are lenders of the net debt, SBI has bankrolled working capital.

Jindal said JSW has a robust balance sheet and will use its expertise to turn around the company and make it profitable in a span of merely a year.
To do this, the company has chalked out a few short-term immediate measures which it plans to implement in the next few months.

Analysts said the timeline is crucial. “Only if JSW is able to turn around Ispat in the targeted time can the price of Rs20 per share paid for a non-integrated company be positive. And it needs to take Ispat’s  Ebidta or operating profit to JSW’s levels in the next two to three years,” said an analyst with a leading domestic brokerage firm, who did not wish to be named.

Sheshagiri Rao, Group chief financial officer of the JSW Group, did not divulge when Ispat will reach JSW’s Ebidta levels, but only said Ispat will turn Ebidta-positive by the end of next fiscal.

Ispat, which has its plants mainly in Maharashtra, currently supplies to the south of India while JSW Steel, with its flagship plant in Vijayanagar, Karnataka, mostly sells its products in Maharashtra. This will be swapped to bring logistical benefits for both the companies.

“Ispat’s materials will move within a territory of 200 kilometres,” Jindal said and added that this will bring in an immediate cost benefit to Ispat as its freight cost will come down to Rs 325 per tonne from a staggering Rs 1,400 per tonne.

Besides, by selling in Maharashtra will also be eligible for a Rs 1,400 per tonne value added tax (VAT) benefit.

Jindal said Ispat’s financial imbalance was a result of high power cost and no backward integration despite having claims to iron ore and coking coal mines.

Therefore, the company has initiated talks with Maharashtra Government to divert power to Ispat’s plants from its upcoming 300 MW power plant in Ratnagiri, which is operated by JSW Energy, a subsidiary of JSW Steel.
Ispat currently has two plants, both in Maharashtra. One is a 3 million tonne per annum plant at Dolvi and another is a 0.4 mtpa plant at Kalmeshwar near Nagpur.

Over the next three to four months, JSW will put in Rs 3,100 crore as per the capex plan of the erstwhile Ispat Industries which will be invested in increasing the capacity to 4.2 mtpa, setting up of a 1 mtpa coke oven plant, a pellet plant, a 200 MW power plant and developing Ispat’s captive mines.