JSW Steel Ltd., India’s third-largest producer of the alloy, will start a 65 billion-rupee ($1.2 billion) expansion to turn around a unit that reported the biggest annual loss among the nation’s steelmakers.
The environment ministry’s first approval to a steelmaker this year will allow JSW Ispat Steel Ltd. to raise capacity at its factory near Mumbai by 67 percent to 5 million metric tons and build an adjacent pellet facility and a power plant, Group Chief Financial Officer Seshagiri Rao said yesterday in an interview. JSW Ispat will be able to convert low-grade iron ore into usable raw material, he said.
The expansion may help Chairman Sajjan Jindal’s biggest acquisition cut costs and turn to profit in about two years, according to Niraj Shah, an analyst at Fortune Equity Brokers India Ltd. The addition will aid JSW, which has been grappling with scant supplies of ore at its largest plant in Karnataka, to feed demand in the western part of Asia’s third-largest economy where power plants, roads and ports are being built.
“The cost cutting measures can now be accelerated and JSW Ispat will be able contribute positively to JSW Steel,” said Mumbai-based Shah. “JSW Ispat has been facing tough times and reporting losses due to high interest rates and high raw material and power costs.”
JSW Ispat rose 1.5 percent to 10 rupees at the close of trade in Mumbai. The stock has risen 7 percent this year, compared with a 25 percent gain in the benchmark BSE India Sensitive Index. JSW Steel climbed 1.8 percent to 742.85 rupees.
The increase in capacity will help JSW, which agreed to buy the unit for 21.6 billion rupees in December 2010, lower its dependence on moving steel from its Karnataka factory to meet demand in the western market. The 4 million ton pellet plant will process low-grade iron ore, reducing JSW’s reliance on high-cost ore sourced from external suppliers, Shah said. The projects will come up at the Dolvi factory, which produces hot rolled coils used in making cars, Rao said.
“This was the final clearance,” Rao said. “The expansion projects can now commence.”
JSW plans to raise $1 billion in overseas loans to pay the rupee debt of JSW Ispat after absorbing the unit, Rao had said in October. JSW Ispat, which has a debt of 70 billion rupees, pays about 11 percent interest, while JSW Steel pays 7 percent, he said at the time.
The unit had a net loss, for a third consecutive year, of 2.6 billion rupees in the 12 months ended June 30 due to high raw material, power and interest costs. The loss was the biggest among 126 steelmakers in India, according to data compiled by Bloomberg.
JSW said in September it plans to absorb JSW Ispat to share freight, energy and input costs. Curbs on iron ore mining in Karnataka because of environmental concerns and high interest rates have hindered JSW’s effort to turn around the unit.
A tax writeback helped JSW Ispat return to profit in the three months ended June 30, after posting losses for four straight quarters.
Investors will get one JSW Steel share for every 72 shares of JSW Ispat that they own. JSW Steel’s founders will own 35.12 percent of the merged company. JFE Holdings Inc. of Japan, which owns a 15 percent stake in JSW Steel, will own 14.92 percent of the combined entity.
The merger with JSW Ispat will result in a sharp increase in debt for JSW Steel, which is a concern, Chirag Shah and Faisal Memon, analysts at Barclays Plc in Mumbai, said in an Oct. 29 report. The brokerage estimates a consolidated debt of 264 billion rupees after the merger, compared with 184 billion rupees as of Sept. 30.
JSW Ispat refinanced its debt in August last year, lowering its interest cost. The net debt of the combined entity will jump 40 percent to 232 billion rupees, Bijal Shah and Jaykumar Doshi, analysts at India Infoline Ltd. in Mumbai, wrote in a report on Aug. 30. JSW Ispat has carried forward tax losses of about 75 billion rupees, equivalent to a tax shield of approximately 25 billion rupees, which JSW Steel may use to cut its expenses, they wrote.