JSW Steel rating – Buy: BPSL deal to have minimal impact on earnings

JSTL, along with a JSW group firm, has completed the acquisition of Bhushan Power & Steel (BPSL) for an EV of Rs 194 bn. The implied EV/ton of ~$890 is not cheap although BPSL’s interim cash flow, if provided to JSTL, can bring down the acquisition cost. We see minimal earnings impact although net debt will rise by ~9%. On the positive side, the acquisition provides JSTL a footprint in eastern India along with potential for brownfield expansion.

JSTL completes BPSL acquisition: JSTL has invested ~Rs 10 bn as equity and ~Rs 41 bn as optionally convertible instruments, and will hold 49% equity stake in BPSL. A JSW group company — JSLPL (JSW Shipping and Logistics) — has also invested ~Rs 10 bn as equity and will hold 51% stake. The balance ~Rs 132 bn has been raised as debt at BPSL and its holding company level.

The convertible instruments held by JSTL are convertible to equity at par and can raise its stake in BPSL to 80%+. The acquisition remains subject to litigation where the erstwhile promoter challenged the deal and the Enforcement Directorate attached the BPSL asset to a probe; JSTL has the option to roll back the transaction in case of adverse court rulings.

JSTL turning largest steel producer with diversified regional footprint: BPSL has primary steel capacity of ~3mtpa in the eastern part of India; it also has ~1mtpa downstream capacity in north and east of the country. JSTL currently has 19mtpa steel capacity. With the acquisition of BPSL and the upcoming commissioning of 5mtpa brownfield expansion in Jun-Q, JSTL’s India capacity will rise to 27mtpa, making it the largest steel company in the country. It will also have a diversified regional footprint with ~13mtpa capacity in south, ~10mtpa in west and ~4mtpa in east of the country.

Acquisition not cheap but minimal earnings impact and option values: The implied transaction EV/ton of ~$890 is not cheap although BPSL’s interim cash flows during the insolvency period, if provided to JSTL, can bring down the acquisition cost. Assuming an Ebitda/ton of Rs 10K in FY22-23e, we see the transaction having minimal earnings impact for JSTL although JSTL’s net debt will rise by ~9% (BPSL would not be consolidated given 49% stake).

Land availability at BPSL provides JSTL scope for further brownfield capacity expansions, especially in eastern India where it has a weaker presence. JSTL also plans to explore synergies with its earlier acquired Monnet Ispat as the two facilities are less than 100 km apart. BPSL should also have accumulated tax losses which could be utilised if it eventually gets amalgamated into JSTL. We rate JSTL as Buy with Rs 510 PT, based on 6.7x FY23 EV/Ebitda (BPSL stake has nearly-zero equity value on our assumptions).