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Adarsh Gopalakrishnan

BL Research Bureau

The stock of JSW Steel closed almost flat on Thursday after spiking up 6 per cent in early trade. Reports of Japanese Steel company JFE Holdings picking up a stake in the company drove stock prices higher; but the company’s official announcement mentioned only a strategic tie-up between the two steel companies. JSW Steel has entered into a strategic tie-up with JFE Holdings — the sixth largest global producer of steel in 2008 turning out 33 million tonnes with a portfolio of long, flat and value added products. JSW Steel has a capacity to produce 7.8 million tonnes per annum with flat products accounting for close to 70 per cent of this output.

The tie-up is mainly for the production of automotive steel (flat, cold-rolled products), with the JSW-JFE combine looking to capitalise on the Indian automobile sector, which is expected to grow at 10-14 per cent this year. Both the companies stand to benefit from the partnership, with JFE set to enter the growing Indian market and JSW gaining technical know-how to produce quality value-added steel products.

With several Japanese automobile majors expected to commence production in India, JFE’s relationships with big automobile names in its home country should serve the combine well in the India plans too.

Imports of cold-rolled steel by automobile companies into India are subject to a 5 per cent customs duty, this component and freight costs would be a valuable saving for a domestic steel supplier as the industry is characterised by slim margins. The possibility of the companies taking stakes in each other, which has been mentioned, should bode well for JSW’s expansion plans. The company plans to scale up to11 million tonnes per annum FY11, but faces an impediment in its already high consolidated debt equity ratio of close to 1.8:1. Any cash infusion from an actual stake sale could help reduce debt and lower interest costs.

The companies have also indicated the possibility of future tie-ups for production of steel and to work together to cut operational expenses. Several reports suggest to the possibility of JFE taking a 10 per cent stake in the Indian company, with estimates indicating the stake sale could see a price between Rs 900 and Rs 1,400 a share. However, these are purely in the realm of speculation. The stock closed at Rs 960 on November 19.

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