JFE Buys $1 Billion Stake in JSW Steel to Tap Rising Indian Auto Demand

JFE Holdings Inc., Japan’s second- largest steelmaker, agreed to buy 48 billion rupees ($1 billion) of securities in India’s JSW Steel Ltd. to tap demand in the world’s second-fastest growing automobile market.

JFE’s steel unit will get a 14.99 percent stake in JSW Steel, the Tokyo-based company said today in a statement on its website. Nomura Holdings Inc. advised JFE, while Citigroup Inc. and Amarchand & Mangaldas & Suresh A. Shroff & Co. advised JSW, the companies said.

Buying a stake in India’s third-largest steelmaker gives JFE access to an automobile market that grew 32 percent in the first five months of this year, second only to China. Vehicle demand in Japan may fall 2 percent this fiscal year.

“In Japan there’s no growth for steel companies,” Giriraj Daga, an analyst at Khandwala Securities Ltd., said by phone in Mumbai. “In India it would be over 10 percent for the next decade.”

JFE Steel’s investment in the Indian partner will exceed 100 billion yen ($1.15 billion) in total, Shigeru Ogura, vice president at JFE, said today at a press conference in Tokyo.

Shares of JFE Holdings closed down 3.1 percent to 2,656 yen in Tokyo. JSW Steel shares fell 0.9 percent to 1,160.20 rupees at the end of trading in Mumbai.

Waning Demand

“We can no longer count on domestic demand with the declining number of children,” Ogura said, referring to Japan’s birth rate. “India is an appropriate market for expansion.”

Sales of automobiles in Japan may drop to 5.52 million units in the 12 months started April 1 from an estimated 5.63 million the previous year, the auto manufacturers association forecast on March 15.

JFE has been asked by Japanese carmakers expanding in India to supply steel in the country, Ogura said. As part of the alliance, JFE will help improve operations at JSW’s Vijayanagar mill, which is close to the factories of automakers, including Hyundai Motor Co., Tata Motors Ltd., and Nissan Motor Co.

The JSW Steel securities will be converted at a minimum price of 1,331 rupees or a maximum of 1,500 rupees a share, depending on the share price performance of JSW Steel, the Mumbai-based company said.

More Ventures

“The big steel mills globally are trying to get into the Indian market through acquisitions or by buying stakes,” Goutam Chakraborty, an analyst with ICICI Securities Ltd. in Mumbai, said before today’s announcements. “We’re expecting there may be more of such activity.”

JFE’s larger domestic rival Nippon Steel Corp. is also teaming up to sell value-added automotive steel. Nippon Steel and Tata Steel Ltd. will spend as much as 35 billion yen to form a venture to produce automobile steel in India, the Tokyo-based company said Jan. 28. The venture will be located at Tata Steel’s Jamshedpur factory complex in eastern India and will start operations by March 2013.

The deal with JFE will give JSW “cutting-edge” technology and help access the growing market of automobiles in India, Vice Chairman Sajjan Jindal said. The proceeds will also help ‘de- leverage” the balance sheet, he said.

Earnings

JFE Holdings forecast today net income will rise 2.6 times to 120 billion yen for the year through March 31, 2011, aided by a demand recovery. The outlook fell short of the 173.8 billion yen average of 22 analyst estimates compiled by Bloomberg. Sales may increase 20 percent to 3.42 trillion yen.

The company had a profit of 28 billion yen in the fiscal first quarter, compared with a loss of 41.6 billion yen a year earlier, according to a statement today.

JSW Steel today said profit rose 26 percent to 2.95 billion rupees, or 15.21 rupees a share, in the three months ended June 30 from 2.34 billion rupees, or 12.06 rupees, a year earlier. Sales climbed 21 percent to 48.20 billion rupees.

Total expenses in the quarter rose to 41.40 billion rupees from 36.40 billion rupees a year earlier, JSW Steel said in a separate statement to the Bombay Stock Exchange.

Coking coal expenses in this quarter have remained high and the company expects “some respite” in the next quarter, Jindal said at a media briefing in Mumbai. Iron ore shipments from JSW’s Chile mines is expected to start in the third quarter, he said.

Construction of JSW Steel’s planned factory in West Bengal state is expected to start this year, Jindal said. Talks have yet to start with JFE on the company’s proposed investment in the factory, he said.

To contact the reporters on this story: Masumi Suga in Tokyo at msuga@bloomberg.net; Madelene Pearson in Mumbai on mpearson1@bloomberg.net

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