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JSW Steel is an outlier in a sector riddled with heavy debt

This hyper activity in the M&A space by the company offers numerous takeaways.

Sumant Banerji        Last Updated: February 27, 2017  | 19:10 IST
JSW Steel is an outlier in a sector riddled with heavy debt

Sumant Banerji, Senior Assistant Editor, Business Today
At a time when the domestic steel industry is plagued with non performing assets--over Rs 1.15 lakh crore at the last count-- Sajjan Jindal's JSW Group's multiple attempts at acquisitions goes against the script. Reports from Italy late on Sunday said a consortium led by Italian state lender CDP, which also consists of JSW Steel, businessman Leonardo del Vecchio's holding company and steelmaker Arvedi, have submitted their bid for IIva steel plant. It is rumoured to be in the range of 500 million and 1 billion Euro.

In the race for the loss making, yet Europe's largest, steel plant with a capacity of 10 million tonnes, JSW is competing with another consortium led by none other than world's largest steel maker ArcelorMittal. Should JSW's consortium emerge victorious, it is believed the Indian firm will have a 35 per cent stake in it. Since its takeover last year, the Italian government has been trying to find a bidder for the plant in its bid to save jobs and clean up its polluting factories. Judges put key parts of it under special administration in 2012 following accusations it had caused serious health problems in the surrounding Puglia region in southern Italy.

This isn't the first time JSW has shown interest in an Italian steel company. The company was in the race to buy Lucchini, Italy's second largest steel maker in 2014, but it came to nought. Neither is it the only acquisition the company is chasing at this point in time. JSW has evinced interest in domestic steel companies like Bhushan Steel and only last week, it emerged as the sole bidder for a controlling stake in Monnet Ispat Energy. It is also evaluating some of the assets of Tata Steel UK while sources say it is interested in picking up a stake in Essar Steel should any of its incumbent investors choose to exit.  

This hyper activity in the M&A space by the company offers numerous takeaways. One, for a company that has itself weathered a high debt balancesheet crisis between 2000-03, when a slump in the global steel scenario almost upset its grand expansion plans, it is not afraid to take on risks. Even as it stands today, JSW Group's debt of Rs 44,000 crore is sizeable. Yet it generates more cash than its peers and is considered more efficient than the likes of Steel Authority of India and Tata Steel. As such, it knows its investors would be less jittery if it decides to take on even more debt in pursuit of a global stressed asset. It isn't in steel alone where it is hedging its bets. Group firm JSW Energy last year reopened talks with Jaypee Group to acquire three of its power assets even as initial discussions in 2015 fell through. Clearly, JSW group as a whole is unrelenting.   

Two, it understands the global slowdown in the sector has undermined the valuations of some assets that may otherwise be top notch. One needs to look no further than the world's biggest steel maker L N Mittal to understand the opportunity typically presented by any economic slowdown. Barring the marquee acquisition of Arcelor in 2006, Mittal has almost entirely built up his company by buying loss making inefficient steel plants across the world, stripping them down and then turning them around. The interest of his company in IIva at a time when ArcelorMittal itself is busy managing its debt, only lends credibility to the proposed acquisition.

Three, JSW is convinced about the India growth story. For any acquisition--big or small--to yield dividend, it is important for the economy to perform well. The main reason for a takeover is to gain scale and increased demand for the commodity is central to the success of any such acquisition. The company seems certain there will be no miscalculation on that front. Against a world average per capita steel consumption of 208 kg, India is languishing almost at the bottom at just 61 kg. The new National Steel Policy 2017 envisages increasing the capacity in the country more than two fold from 122 million tonnes per annum (mtpa) to 300 mtpa by 2030 if the country is to achieve some parity with the world. It is also precisely this kind of imbalance that consumption of steel has continued to grow in India, even as major markets in the world have struggled over the past few years.  In 2015, India overtook US to become the third largest steel producing country and by the turn of this decade there are chances it may overtake Japan too. Even if the policy targets are not realised--in hindsight they never are-- from such a low base and with so much infrastructure to be built, there is no denying demand for steel will grow in India. Any consumption boom means domestic companies ought to be ready with their capacity. JSW seems to be doing just that.

It is a high risk game no doubt and there are many variables that can upset this story. Big corporations are however built only by taking risks, flowing against the tide and turning challenges into opportunities. Jindal seems to be doing just that. 

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