Bhushan Power adds to JSW Steel’s domestic capacity but will the latter settle for a minority stake again?
The structure JSW Steel (JSW) uses to complete its acquisition of debt-ridden Bhushan Power & Steel (Bhushan Power) will determine the impact on its financials.
Tata Steel and JSW have successfully snapped up some of the big steel assets on offer. Tata Steel acquired Bhushan Steel using its own balance-sheet but JSW Steel joined hands with Aion Capital to acquire Monnet Ispat & Energy (Monnet). Will JSW do a repeat is a question investors will be wondering. The answer is not an unequivocal yes.
In Monnet, JSW owns an effective stake of 23.1 percent. That stake is accounted under the equity method, meaning only a portion of Monnet’s profit or loss will reflect in JSW’s earnings.
In FY19, that will prove helpful. In the nine months ended December 2018, Monnet’s standalone financials revealed a loss of Rs 554 crore before exceptional items. After exceptional items, the loss increased to Rs 3327 crore. If JSW’s stake were above 50 percent, then these losses would have pulled down JSW’s consolidated profit.
Once Monnet’s financials improve, JSW can increase its stake. That may come at a premium then compared to now, but Monnet’s improved performance may make it worth it.
JSW’s Bhushan Power resolution bid is pegged at Rs 19,500 crore, much higher than the Monnet bid which amounted to less than Rs 3,000 crore. Even if JSW were to fund a fourth of the Bhushan Power bid, that’s around Rs 4,900 crore. That’s a sizeable sum and how it funds it will be a concern for shareholders. JSW has its own capex plans in the domestic market. It has also made overseas acquisitions, with plans to invest additional sums.
In return, the acquirer will get an integrated 2.3 million tonne steel plant with a mix of flat and long products, along with associated facilities and a captive power plant. Since the company is unlisted, details of its current financial performance are not available. In FY17, its sales were Rs 8,701 crore, other income Rs 153 crore, and EBITDA was Rs 2,292 crore. That’s a decent even if dated EBITDA margin. But Bhushan Power incurred a loss of Rs 511 crore due to interest costs of Rs 920 crore and depreciation of Rs 861 crore.
Due to litigation, the Bhushan Power resolution process got delayed. Its completion coincides with a period of uncertainty in steel, chiefly due to fears that China’s demand for steel is slowing and the effects of an ongoing trade war between the US and China. Steel prices have turned weak and this has affected domestic realisations too. An increase in iron ore prices due to the problems of major iron ore miner Vale may end up pushing up steel prices but that is not certain.
The current environment may seem tough but the impact (good or bad) of large acquisitions are visible in the longer run. Bhushan Power may also require additional investments, to ramp-up capacity or complete unfinished projects. Still, its current debt will be cut to 41 percent of its size, making the project a more viable proposition.
Bhushan Power’s performance also makes the structure a difficult choice. If it is profitable, JSW may want more of those profits to reflect in its own financials. Also, a minority stake raises the possibility of paying a significant premium later to buy out majority investor.
But a higher or majority stake implies a bigger load on JSW’s balance sheet. JSW’s net debt-to-equity ratio was 1.4 times, with net debt of Rs 46,030 crore as of December 31, 2018. The Bhushan Power acquisition is no doubt a big win for JSW, but the deal structure will become crucial to evaluate its impact on its financials.
