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 affordable though BPSL’s interim money flow, if offered to JSTL, can bring down the acquisition expense. We see minimal earnings effect though net debt will rise by ~9%. On the positive side, the acquisition gives JSTL a footprint in eastern India along with prospective 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 firm — 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 firm 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 topic to litigation exactly where the erstwhile promoter challenged the deal and the Enforcement Directorate attached the BPSL asset to a probe JSTL has the solution to roll back the transaction in case of adverse court rulings.
JSTL turning biggest steel producer with diversified regional footprint: BPSL has principal steel capacity of ~3mtpa in the eastern portion of India it also has ~1mtpa downstream capacity in north and east of the nation. JSTL presently 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, producing it the biggest steel firm in the nation. It will also have a diversified regional footprint with ~13mtpa capacity in south, ~10mtpa in west and ~4mtpa in east of the nation.
Acquisition not affordable but minimal earnings effect and solution values: The implied transaction EV/ton of ~$890 is not affordable though BPSL’s interim money flows for the duration of the insolvency period, if offered to JSTL, can bring down the acquisition expense. Assuming an Ebitda/ton of Rs 10K in FY22-23e, we see the transaction getting minimal earnings effect for JSTL though JSTL’s net debt will rise by ~9% (BPSL would not be consolidated offered 49% stake).
Land availability at BPSL gives JSTL scope for additional brownfield capacity expansions, specially in eastern India exactly where it has a weaker presence. JSTL also plans to discover synergies with its earlier acquired Monnet Ispat as the two facilities are significantly less than one hundred km apart. BPSL should really also have accumulated tax losses which could be utilised if it sooner or later gets amalgamated into JSTL. We price JSTL as Buy with Rs 510 PT, based on 6.7x FY23 EV/Ebitda (BPSL stake has almost-zero equity worth on our assumptions).