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JSW Steel in lead to buy Bhushan Steel

JSW Steel emerged as the highest bidder for the indebted company with Tata Steel in second place.

JSW Steel has emerged as the highest bidder for indebted steel company, Bhushan Steel, with an offer of ~Rs29,500cr with Tata Steel in second place with a bid of ~Rs24,000cr. According to media reports, JSW has offered to take over ~Rs28,000cr of Bhushan Steel’s debt as well as infuse ~Rs1,000-1,500cr for  working capital purposes. The bid submitted by the consortium of Bhushan steel employees is very likely to be rejected as the consortium does not have a bank guarantee. ArcelorMittal did not submit a bid, as expected owing to its ineligibility due to its stake in Uttam Galva Steels. In order to become eligible for future auctions, ArcelorMittal announced plans to sell its 29.1% stake in Uttam Galva Steels to the co-promoters in the company.

JSW Steel’s bid for Bhushan Steel is via a joint venture with the private equity arm of Piramal Enterprises. Japanese steelmaker, JFE Steel, which was supposed to take part in the joint venture, has withdrawn from the deal. Under the terms of the joint venture, JSW Steel would gain operational control of Bhushan Steel. Bhushan Steel is a producer of cold-rolled steel products  with a steelmaking capacity of 5.6mn tonnes.

JSW Steel is the largest private sector steel manufacturer in the country with a capacity of 18mn tonnes per annum (mtpa) in FY17. The company aims to expand this capacity to 23mtpa by 2020. The company also owns a plate mill in USA and iron ore mines in Chile. The standalone finished steel production for the company stood at 11.4mt for 9MFY18, an increase of 5% yoy. The management has stated a production target of 15.5mt for FY18.

We expect the company to report revenue CAGR of 7.4% over FY17-20E aided by (a) 8.6% CAGR volume growth in sale of steel products supported by spending on construction and infrastructure, and (b) affordable schemes to help in higher real estate spending. EBITDA margins are also likely to expand by ~252bps owing to better utilization levels. The stock is currently trading at 9.8x FY20E EPS.

JSW Steel Ltd ended yesterday’s trade at Rs 304.65, up by 5.03% after announcing a record high production for the month of January.