Shares of JSW Steel Ltd hit a new 52-week high of ₹470 on the National Stock Exchange (NSE) on Tuesday. There is immense optimism on the steel sector right now and the JSW stock is basking in that glory. Furthermore, analysts reckon that the impact of the Bhushan Power and Steel acquisition may not be too harsh on JSW’s earnings and balance sheet.
The enterprise value (EV) for the Bhushan Power acquisition is around ₹19,400 crore. According to analysts at Jefferies India Pvt. Ltd, while the acquisition will have minimal earnings impact, its net debt will rise by around 9%.
“The implied transaction EV/tonne of about $890 is not cheap, although Bhushan Power’s interim cash flows during the insolvency period, if provided to JSW Steel, can bring down the acquisition cost,” it said in a report on 29 March.
With the Bhushan acquisition and the upcoming commissioning of 5 million tonnes per annum (mtpa) brownfield expansion, JSW Steel will become the largest steel company in India with a capacity of 27 mtpa, said Jefferies’ analysts.
The acquisition also provides the Sajjan Jindal-controlled company increased presence in eastern India. Besides, Nomura Financial Advisory and Securities (India) Pvt. Ltd analysts said higher steel spreads help keep concerns about debt in check.
“Based on our expectation of steel spreads in FY22F, credit metrics are likely to be maintained within target ranges by end-FY22.
We estimate that Ebitda margin of 25%+ can be maintained over FY22-23F (versus consensus estimates of 22.5-23.5%),” said Nomura’s analysts in a report on 29 March. Ebitda is earnings before interest, tax, depreciation and amortization.
Note that JSW’s December quarter earnings were strong. The March quarter is also expected to be robust.
The JSW stock has outperformed the Nifty 100 index meaningfully this year. Meanwhile, media reports said JSW is now eyeing public sector unit Neelachal Ispat Nigam Ltd and has submitted an expression of interest.
Tata Steel Ltd and ArcelorMittal Nippon Steel India are said to be other companies in the race for Neelachal Ispat.
If JSW bags this asset, too, its lead over other domestic manufacturers will rise even further. Neelachal has an integrated steel plant of 1.1 mtpa capacity.
To be sure, shares of other steel companies rose on Tuesday as well, after multinational brokerage firms CLSA and JP Morgan said they were bullish on the steel sector and see more upside in these stocks.
Stocks of Steel Authority of India (SAIL) Ltd and Tata Steel Ltd increased by 3-4% on Tuesday, with the shares of the latter touching a new annual high.