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Impact of JSW Ispat Merger with JSW Steel

September 3, 2012

JSW Ispat has been merged with JSW Steel. While the transaction will be completed by end FY13, the merger will be effective from July 2012. JSW Ispat shareholders will be issued one share of the merged entity for every 72 shares of JSW Ispat. With this transaction, JSW Steel‟s outstanding shares will increase from 223m to 241.7m.

For Ispat, of the Rs3.5-5 bn of synergies from the merger, Rs2.5 bn is expected to come from interest cost savings as JSW’s cost of borrowing is ~3.5 pp lower than Ispat’s. These may start over time, i.e. whenever interest rate reset dates occur. The risk of course is that JSW’s cost of debt rises due to higher leverage.

JSW Ispat’s net worth was negative and by management‟s own admission, the bankers were forcing it to infuse equity into JSW Ispat. The merger was a better option as JSW Steel (a tax-paying entity) could benefit from the accumulated losses of JSW Ispat.

Management played down the oft quoted “benefit” of the merger in terms of the carried forward losses: of the Rs97 bn of carried forward losses from Ispat, Rs32 bn would be the potential tax savings. However, given that JSW itself is a MAT paying company, according to JSW it would be a while before these losses can be used.

What is the Share Target Price of JSW Steel Post Merger and Dilution with JSW Ispat ?
EPS Expectations are highly divergent from Rs 47 to Rs 81 for FY 2013 and from Rs 65 to Rs 97 for FY 2014. Existing investors may SELL and switch to Tata Steel, at-least a Part of their Holding.

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