Companies & Sectors
JSW Ispat’s merger with JSW Steel will be negative, says Nomura

JSW Ispat’s management had guided that the merger with JSW Steel would happen once the company turns profitable. Is the time ripe now for the merger? asks Nomura

News reports suggest that JSW Ispat might be merged into JSW Steel in the next few weeks. JSW Ispat denies it but it had earlier suggested that the merger would happen once the company turns profitable. Nomura Equity Research has analysed the scenario, if the merger does take place this year and believes that the merger at current levels would be negative for JSW Steel given JSW Ispat shares would ideally get a negative value owing to low profitability and high debt. JSW Steel already holds close to a 49.3% stake in JSW Ispat. Nomura predicts that JSW Steel shares could fall by Rs45 post-merger.


Nomura’s estimates include: Post merger, JSW Steel would have total consolidated EBITDA of Rs7,500 crore in FY13 and Rs8,200 crore in FY14. The merged entity will have an equity value of Rs15,800 crore. However, JSW Steel would benefit from JSW Ispat’s deferred tax assets of Rs2,090 crore. JSW Steel can use it over the next six years and hence, ascribe an NPV (Net Present Value) of Rs1,290 crore to the deferred tax assets. As a result, JSW Steel on a consolidated basis would have value of Rs721 per equity share, compared with the current target price of Rs766 per equity share.


Nomura expects equity dilution of 7.5%-8.1% for JSW Steel on account of the merger. So to acquire the remaining shares, JSW Steel would have to issue 16.9-18.2 million shares.


As per news reports, the merger ratio would be in the range of one share of JSW Steel per 70-75 shares of JSW Ispat. JSW Steel currently has 223 million shares, which would go up to 241.2 million shares (assuming merger at a ratio of 1:70).


Leverage is likely to increase significantly for the consolidate entity, according to Nomura analysts. More than the impact on the P&L account, JSW Steel’s balance sheet would see major deterioration on account of this merger. JSW Steel’s total consolidated net debt would go up to Rs25,000 crore (from current Rs17,500 crore) and debt-equity ratio would also increase from 1.03 (currently) to 1.4 (post-merger).


In spite of Nomura saying that the merger would be a negative development for JSW Steel, there could be some synergy benefits from lower interest costs for JSW Ispat debt. Currently, the average cost of debt for JSW Ispat is close to 15%, while the same for JSW Steel is close to 7.5%. This could result in savings of close to Rs350 crore and an increase in net profit of Rs250 crore, assuming that the interest cost on the debt of JSW Ispat comes down to 10%, says Nomura.


Overall, the merger could be described as less favourable for investors and more desirable for management and employees of the companies.


BSE to enter capital markets by March next year

Finally, the oldest stock exchange from Asia, is going to list its own shares, which may allow its stakeholders a good exit price

BSE Ltd, formerly known as Bombay Stock Exchange, has decided to list its shares by March 2013. This was announced at the annual general meeting (AGM) of the exchange held on Friday. Only thing, BSE would have to list its shares on rival bourses like the National Stock Exchange (NSE), or MCX-SX.


BSE’s shareholders, who are mainly brokers, so far have been watching the erosion silently in the hope that someone at the top like Madhu Kannan, the hotshot imported from New York, would manage to list the exchange at a good valuation and give them a good exit price. Mr Kannan’s expensive management team, comprising a number of US citizens (some of Indian origin), were expected to attract foreign institutional investors (FIIs) to invest. However, SEBI’s new rule of pre-empting 25% of the profit every year may turn out to be a big dampener and worried shareholders and staff are beginning to ask questions. Incidentally, after SEBI announced the new policy framework for bourses, the next day, Mr Kannan announced his plans to quit BSE to join the Tata Group.


Earlier in April, market regulator Securities and Exchange Board of India (SEBI), while accepting some recommendations of the Bimal Jalan Committee, has said that 51% stake of bourses could be held by the public. “The stock exchanges will have diversified ownership and no single investor will be allowed to hold more than 5%, except the stock exchange, depository, insurance company, banking company or public financial institution, which may hold up to 15% while 51% of the holding of the stock exchanges will be held by the public,” it said.


The stock exchanges may be permitted to list when they put in place the appropriate mechanisms for tackling conflicts of interest, SEBI said, adding, the stock exchanges will not be allowed to list on itself. No stock exchange shall be permitted to list within three years from the date of approval by SEBI, it said.


Notifying new rules for ownership and governance of exchanges in June, the market regulator pegged the net worth of stock exchanges at Rs100 crore. It said direct and indirect exposure to any stock exchange will be considered while calculating the prescribed shareholding limit.


The new rules allows bourses to list on any recognised stock exchange other than itself and its associated stock exchanges, within three years of commencing operations, subject to certain criteria.


With its shares skyrocketing 26% on debut trade, country’s largest commodity bourse Multi-Commodity Exchange (MCX) remains the most successful initial public offering (IPO) so far in 2012 amid turbulent market conditions. MCX is the only exchange listed in India, till date. Listed on 9th March, shares of MCX opened at Rs1,387 on the BSE—a premium of 34% compared to its issue price of Rs1,032. Even though, the scrip lost its initial momentum, it managed to close with about 26% gain at Rs1,297.05. On the first day, it even touched the high of Rs1,420.


BSE is a corporatized and demutualised entity, with a broad shareholder base which includes two leading global exchanges, Deutsche Bourse and Singapore Exchange as strategic partners.


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