Indian Institute of Management Ahmedabad
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March 31, 2016
JSW Steel’s Ispat Acquisition: The Opportunity
In December 2010, Mr. Sajjan Jindal, Chairman and Managing Director of JSW Steel (hereafter
referred to as JSW), India’s leading integrated steel producer with overall steel manufacturing
capacity of 7.8 million tons per annum (mtpa), was actively considering acquisition of Ispat
Industries. While a consortium of lenders to Ispat had sounded out JSW and other firms only a
few weeks ago about the possible acquisition, JSW had Ispat on its radar for considerably longer
period. JSW had already carried out due diligence and the time had come to take a final
decision.
The acquisition of Ispat would increase capacity of combined entity from 7.8 to 11.1 mtpa and
was in line with JSW’s multipronged strategy to realize the aspiration of being a 40 mtpa
company by next decade. This was aggressive and a stretch goal given that the total steel
production across all public and private sectors firms in steel sector in India was 68.3 mtpa in
2010. Capacity expansion of existing plants, investment in two 10 mtpa greenfield facilities in
West Bengal and Jharkhand, and acquisition of other steel companies were some of the ways
that being considered by JSW to reach the goal.
The decision was not easy given the fact that Ispat had huge debts, a long pipeline of unfinished
projects, high production costs and unpredictable cash flows. While an appetite for risk was
ingrained in JSW’s DNA, Mr. Jindal clearly recognized the need to ascertain operational and
strategic synergies and to critically analyse challenges and opportunities related to Ispat’s
acquisition before going ahead with the decision.
STEEL SECTOR SCENARIO IN 2010
In 2010, India was the fourth largest producer of steel at 68.3 mtpa while China was the largest
at 626.7 mtpa. The five years prior to this had seen India improving its ranking from 6th to 4th in
the process surpassing Russia and South Korea (Exhibit 1). However, the per capita steel
consumption of 47.8 kg in 2009 paled in comparison to other leading steel producing countries
(Exhibit 2) and the world average of 202.7 kg. About 42% of the finished steel consumption in
India in 2009 was attributed to tube, fabrication, wire drawing and fastener sectors; 34% to
construction sector while oil and gas (6%), machinery (5%), automobile (5%), household
appliances (3%), railways (3%), containers (1%) and shipbuilding (1%) were the minor
consumers1.
1 Chatterjee, A. (2009). Transition of the Indian steel industry into the twenty-first century. Ironmaking and Steelmaking,
Vol 36(7). 491-499
Prepared by Professors Sunil Sharma, Saral Mukherjee and Parvinder Gupta, Indian Institute of
Management, Ahmedabad. Research assistance provided by Shaivi Joshi is acknowledged.
Cases of the Indian Institute of Management, Ahmedabad, are prepared as a basis for classroom
discussion. They are not designed to present illustrations of either correct or incorrect handling of
administrative problems.
© 2016 by the Indian Institute of Management, Ahmedabad.
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The Indian steel industry consisted of state (public) sector players like Steel Authority of India
Limited (SAIL) and Rashtriya Ispat Nigam Limited (RINL) and private players like Tata Steel,
JSW Steel, Ispat Industries, Essar Steel and Jindal Steel and Power Limited (JSPL). Tata Steel, the
first domestic steel producer, was set up as Tata Iron and Steel Company (TISCO) in 1907. Postindependence in 1947, successive governments placed emphasis on development of the steel
industry and started a number of steel plants in the public sector at Rourkela in Orissa, Bhilai in
Madhya Pradesh, and Durgapur in West Bengal. Later these independent companies were
brought under the holding company of SAIL in 1972. As the economy opened in 1991-92, the
expectation was that long-term structural trends would require India to consume more steel to
support industrialization and urbanization. In the mid and late 1990’s, JSW, Essar and Ispat
were among the many companies that rose in India. It typically took a gestation period of 5-7
years for a greenfield project to come alive. These companies started greenfield projects around
the same time frame and the by the time the projects were executed, steel industry had taken a
structural downturn and around 2002-03 all three opted for corporate debt restructuring (CDR).
From 2003 onwards, the steel commodity cycle picked up again. JSW was the first company to
exit the CDR process in 2004-05 followed by Essar in 2007. By 2010, the contribution of the
private sector players to total crude steel production had increased significantly (Exhibit 3).
In 2010, the steel industry directly contributed 2% to India’s Gross Domestic Product (GDP).
The GDP growth rate of 8.5% in 2010 had slowed considerably from the 9.3% witnessed in 2008,
but was still significantly higher than the growth rate in most major economies except China.
The subprime crisis in the US in 2008 and the subsequent global financial turmoil had
dampened global demand for steel. In 2009, the global steel production and consumption
declined by 8% and 8.7% respectively. In contrast, India registered a growth of 8.1% in steel
consumption and 4.2% in steel production. With demand outpacing production, imports of steel
products increased by 23% (Exhibit 4).
The stellar growth rates of mid 2000s had resulted in concerns over adequate supply of raw
materials. With expectations of rise in steel demand, companies became more concerned about
securing captive sources for raw materials like iron ore, coal, bauxite, etc., for reasons of both
cost and timely availability. Land acquisition was becoming tougher and the government was
taking various measures to prevent exploitation of natural resources. In 2010, a ban on export of
iron ore was issued in Karnataka in an attempt to curb illegal mining in the state2.
Several capacity expansion plans were on the anvil to cater to rising demand. For example, JSW
was planning two 10 mtpa greenfield plants in West Bengal and Jharkhand and the South
Korean steel major POSCO was planning a 12 mtpa greenfield plant in Orissa. Even capacity
expansion at existing locations was also being pursued. In this context, acquisition of weaker
players was a possibility and Ispat was a target for several firms. Ispat had gone into CDR for
the second time in 2009 without getting out of the first CDR of 2000-01. The financial position of
Ispat was critical as almost everything was mortgaged and suppliers were insisting on cash
payments for raw material purchase. It was widely expected that because of its precarious
balance sheet situation, the company might be up for sale in future.
2
http://www.ndtv.com/article/india/karnataka-bans-export-of-iron-ore-to-check-illegal-mining-40673
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JSW STEEL: THE ACQUIRER COMPANY
JSW Steel was the flagship company of the USD 7 billion3 (~INR 31000 crore) JSW Group4 with
diversified interests in steel, energy, cement, and infrastructure. From a single steel rolling mill
in Tarapur in Maharashtra in 1982, the company had become an integrated player with 7.8 mtpa
steel capacity in 2010, which included 6.8 mtpa capacity in Vijaynagar (Karnataka) and 1 mtpa
capacity in Salem (Tamil Nadu). The Salem plant had been acquired in 2004 from Southern Iron
and Steel Company Limited (SISCO). The sick unit was turned around by increasing its capacity
from 0.3 mtpa to 1 mtpa and changing the product mix by focusing on special steels used in
automobile industry.
When it was set up as Jindal Iron and Steel Company (JISCO) in 1982, the company’s focus was
on steel conversion. It used to buy Hot Rolled Coil (HRC) from the market to produce
galvanized and Cold Rolled Coils (CRC) at its Vasind and Tarapur plants (80 and 120 km from
Mumbai respectively) in Maharashtra. Though the conversion business was quite profitable
with EBIDTA margins in the range of 15-26%, success in this business was primarily dependent
on the ability to procure raw materials at low costs. With raw material and finished goods
prices decided by market forces, converters had to constantly strive to reduce their conversion
costs. Thus, from the beginning, JSW was focused on being one of the most efficient convertors
of steel. In contrast, the cost efficiency of several of its competitors like Tata Steel depended
primarily on access to low cost raw materials in captive mines along with integrated steel mills.
Post economic liberalization in 1991, the government allowed convertors to set up steel plants.
Many convertors backward-integrated into steel production and it became increasingly difficult
to procure hot rolled coils for conversion.
In 1995, JSW commenced work on its first upstream steel production plant at Vijayanagar in
Bellary district of Karnataka. The decision was driven by promoters’ aspiration to be an
integrated steel producer. The Hot Strip Mill in Vijaynagar was commissioned in 1997 and the
first Corex technology based 0.8 mtpa steel making facility was commissioned in 1999. The
Vijaynagar plant was located close to the iron ore mines in Karnataka giving it a freight
advantage for sourcing iron ore. A part of HRC produced in Karnataka was transferred to
Vasind and Tarapur for further processing by cold rolling and galvanizing, and the balance
HRC was sold in the open market. The cost of transporting HRC from Vijaynagar to Vasind and
Tarapur was very freight intensive. The cold rolling and galvanized products were then either
sold in the domestic market or were exported. However, the presence in northern and eastern
India was not significant as the products were not price competitive due to the high freight cost
involved in transportation. Moreover, the southern and western parts of India were witnessing
more steel intensive growth compared to the rest of the country.
The Vijaynagar plant had a modular design with flexibility in support infrastructure (viz.
pipelines, water supply, etc.) with a view to expand capacity to 16-20 mtpa in due course. In
3
4
Based on exchange rate of 1USD=INR 45 and INR 1 billion = 100 crore
The energy business (JSW Energy) was involved in power generation (995 MW installed capacity in 2010),
transmission and power trading. The cement business (JSW Cement) started operations in 2009 and utilized the
slag produced by JSW Steel. The infrastructure business (JSW Infrastructure) was providing services through ports,
terminals, shipyards and other facilities. JSW Foundation, the group’s CSR arm, was involved in initiatives in
health, education, livelihood and sports along with art and culture.
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2002, the installed capacity was increased to 1.6 mtpa by commissioning another Corex based
steel making unit. The later capacity additions of 0.9 mtpa (2004), 1.3 mtpa (2006), 3 mtpa (2009)
and another 3 mtpa expected to be completed in 2011 all used the blast furnace technology. JSW
was able to carry out the subsequent expansions at a lower capital cost as the infrastructure was
already in place and it used the learning from the first phase of greenfield project. The planned
capacity additions were adversely impacted by the global financial crisis in 2008 as JSW was
also subjected to financial stress due to depressed global demand and pricing. In 2010, JSW
entered into technology collaboration with JFE Steel of Japan for transfer of latest technology
and best practices in steel industry. JFE Steel bought a 15 percent strategic stake in JSW for USD
1 billion (~INR 4500 crore). Exhibits 5 and 6 show JSW Steel Balance Sheet and Profit and Loss
account in 2009-10 respectively. Exhibit 7 shows JSW and Ispat Steel financial highlights from
2005 to 2010.
JSW offered a wide range of steel products in 2010. It included Hot Rolled, Cold Rolled,
Galvanised, Pre-Painted Galvanised, Galvalume, Pre-Painted Galvalume, Colour Coated, TMT
Bars, Wire Rods, Special Alloy Steel – Rounds, RCS, Bars and Spring Steel Flats. It was the
Indian pioneer of highly specialized products like Pre-Coated Metal (PCM) sheets and VinylCoated Metal (VCM) sheets, making them available in India for the first time. PCM and VCM
sheets could be overlaid with patterns in various colours, design and gloss, allowing the
customer the freedom to design products as per their requirement. JSW had a competitive edge
in long and flat automotive products, steel for high-rise buildings, and the plate and pipe
market.
The cost competitiveness of JSW was based on both lower conversion costs and lower costs of
fixed assets. In 2010, SAIL employed 116,950 employees with labour productivity of 226
tonnes/man/year, Tata Steel India employed 34,101 employees with labour productivity of 510
tonnes/man/year, whereas JSW employed 780 employees5 with an output per employee of
10000 tonnes per year. Consequently, at USD 18/tonne (INR 810/tonne), the labour cost/tonne
for JSW was substantially lower than that for SAIL and Tata Steel, giving it a distinct
competitive advantage. As per Mr. Seshagiri Rao, Joint MD and Group CFO, JSW Steel, JSW
had lowest cost fixed assets because of company’s capability in project construction. He said,
For the initial building phase, JSW had given an EPC contract to L&T for plant
construction. Post that, capital was scarce and the balance sheet did not support
big expansions in a luxurious manner. So to expand further in various phases
from 1.6 to 10 mtpa JSW developed its own project management team. It spilt a
project into various ‘packages’ like blast furnace, electrical, mechanical, civil,
foundation, etc. Within each package it looked into what could be fabricated
within the company and what needed to be procured from outside and from
where. The organization took responsibility for making the expansion work – the
only guarantee from an outside vendor/supplier was that the specific equipment
bought should work the way it was supposed to. This saved the company 15-20
percent EPC contract fee that was paid by other competitors. For certain standard
equipment such as conveyor belts JSW found the Chinese were good and hence
opened an office in China to establish contacts with suppliers and gain
5
Data collated from 2009-10 Annual Reports of SAIL, Tata Steel and JSW Steel.
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recommendations on equipment that could be procured for India. All this
benefitted in terms of reducing cost of building fixed assets.
JSW was ranked second in the rankings published by World Steel Dynamics (Exhibit 8). It had
improved its position from 8th to 2nd within a period of 2 years.
ISPAT INDUSTRIES: THE TARGET COMPANY
Set up as Nippon Denro Ispat Limited in May 1984 by founding Chairman Mr. M. L. Mittal, the
company had operations in iron, steel, mining, energy and infrastructure. In 1984, a plant to
manufacture sponge iron (Direct Reduced Iron) was commissioned at Dolvi in Maharashtra. In
1995, a hot strip mill was set up using Compact Strip Process (CSP) technology developed by
SMS Group, Germany. HRC (Hot Rolled Coil) manufacturing started in 1998 and a 2 mtpa blast
furnace was installed in 2000. By 2004, the capacity of the sponge iron plant had increased to 1.6
mtpa and of HRC to 2.4 mtpa. The last major expansion at Dolvi happened in 2005, when a
sintering unit was installed. In 2005, Ispat became a subsidiary of UAE based Global Steel
Holdings Limited (GSHL), an overseas investment arm managed by Ispat promoters Mr.
Pramod Mittal and Mr. Vinod Mittal, sons of Mr. M. L. Mittal. GSHL held 54% stake in Ispat
and as a result of this transaction, GSHL managed or operated in excess of 14 mtpa steel making
capacity in India, Nigeria, Bosnia, Bulgaria, Libya and Phillipines. Ispat was the biggest
subsidiary of GSHL and its considerable asset base allowed GSHL to strengthen the
consolidated balance sheet for the holding company6 which had been stretched by the rapid
pace of acquisitions during 2003-05.
By 2010, Ispat had two steel making units - an integrated steel plant at Dolvi near Mumbai and
a downstream finishing plant at Kalmeshwar in Nagpur, both facilities were located in the state
of Maharashtra. The 1,200 acre Dolvi complex housed a 3 mtpa HRC plant using state of the art
technologies like CONARC process for steel making and the Compact Strip Process (CSP).
Dolvi was the first steel plant in India to use CONARC and CSP technologies. The CONARC
process was a combination of an electric arc furnace with conventional convertor blowing
process. This dual technology allowed considerable flexibility in terms of raw materials that
could be used, steel grades which could be produced as well as the type of fuel (electricity, coal
or gas) that could be used7. The CSP technology allowed casting in the range of 55-65 mm
thickness, in contrast to the conventional 220-230 mm. In hot conditions, these slabs were
passed through a tunnel furnace, reheated and rolled continuously. This technology resulted in
a smaller product grain size, enabling production of very high strength steel.
The Dolvi plant was integrated in terms of its design and was compact in size compared to a
conventional plant. The steel making process was sequenced and interlinked starting from the
sinter plant and progressing to the blast furnace, steel melting shop, caster and hot rolling mill.
If anything went wrong anywhere, the whole plant would be affected and would come to a stop
within hours. It was as if a single line was at work. For example, if the steel mill stopped, the
caster would stop and after a few hours the steel melting would get affected followed by the
blast furnace. The interlinked nature of the plant demanded high levels of performance,
6
7
http://articles.economictimes.indiatimes.com/2005-09-09/news/27506103_1_gshl-full-control-asset-base
http://www.sms-siemag.com/en/1520.html
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maintenance and operation standards for each unit for the whole plant to work well. There was
little intermediary inventory between different units. This in-turn required cross-functional
teams to work and involved a high level of co-ordination and team-work between different
departments. However, the plant was not fully integrated. It did not have coke oven, pellet,
power plant or captive mines and therefore it had to buy power, coke, pellets, and iron ore from
third parties. In 2009-10, the company produced 3.3 mtpa of hot rolled coils, 0.31 mtpa of cold
rolled sheets/coils, 0.20 mtpa of galvanized coils/sheets and small quantities of tubes, pipes,
and other superior products like Galvalume, a premium metallic coated product. With regard to
annual sales, exports constituted 5%, domestic sales within the state of Maharashtra constituted
71%, and outside state domestic sales constituted 24%.
The Dolvi plant was adjacent to the jetty on Dharamtar creek on the Amba river, managed by
Ispat group company Geetapuram Port Services Limited. Most of the imported raw materials
and some of the exports were routed through this jetty. The jetty was located about 23 nautical
miles from Mumbai harbour and had five berths and a capacity to handle 8 mtpa. It was an allweather port and enjoyed a draft of 4.5 metres. The raw materials like limestone, dolomite, iron
ore, coal, etc., were transferred from ships to barges in the high sea and then transferred from
the barges to conveyors at the jetty for supply to the plant.
In 2010, Ispat was in a precarious financial position and desperately needed cash for operations
and for completing the capital projects that were pending for execution. Power plant equipment
that was purchased in 1998 was lying uninstalled. Though the byproduct gas of the blast
furnace was capable of generating about 55 MW power, it was being burnt in the air since 2001.
A system to reuse this gas would have saved INR 15-18 crore/month. There was a perception
that the management was not fully committed to execute backward integration projects. For
example, while the contracts to set up the power plant had been renewed every year since last
ten years, there was no serious effort to execute the project. This created a trust deficit with
vendors who had doubts about the commitment of management towards the company. It was
increasingly difficult to get more capital infusion for the projects. The interest cost was high and
the future cash flows were uncertain. The company had borrowed heavily in the past and its
balance sheet (Exhibit 9) was already stressed. Efforts to raise funds were not successful and
company went into CDR again in 2009. The Profit & Loss Account for 2009-10 is presented in
Exhibit 10.
EVALUATING THE ISPAT OPPORTUNITY
In 2010, market buzz indicated that Ispat would eventually come up for sale because of its
stressed balance sheet. In September 2010, Mr. Mittal signed an MoU with London based
Stemcor, world’s largest steel trading company, for a 10% stake sell in a deal value estimated at
around INR 250-300 crores8. However the transaction did not materialize, as there were
differences in the terms of valuation, board seat allocation, business operations, governance and
management aspects and adverse events like the Dolvi plant closure on November 7, 2010 due
to unavailability of raw materials9. The total debt at that point was in the range of INR 9,50010,000 crores and the interest payment was due in December 2010. For banks, a payment default
8
9
http://articles.economictimes.indiatimes.com/2010-12-10/news/27569718_1_stemcor-pellet-plant-ispat-industries
http://www.business-standard.com/article/companies/ispat-stemcor-talks-for-stake-hit-a-dead-end110121000048_1.html
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by Ispat would imply the outstanding loans would be categorised as non-performing assets
(NPA). This was not a healthy development for many of the lending banks who were
themselves reeling from the aftermath of the global financial crisis. Concerned over these
developments, banks started approaching various steel companies for strategic investments.
Several firms showed interest in buying Ispat (refer Exhibit 11 for a snapshot of the firms
interested). Ispat had shore based assets10 which could be used to procure/import raw material
and also to supply finished goods to western and southern India markets. Coincidentally, JSW
had been closely tracking Ispat as a potential acquisition target during 2010. The internal team
entrusted with the task of due diligence identified the possible benefits and pitfalls associated
with a JSW-Ispat merger.
Iron ore: Ispat used to source all its iron ore for its Dolvi plant from Orissa and Chhattisgarh via
sea route. JSW was sourcing iron ore for its Vijaynagar plant from mines located in the nearby
Bellary belt of Karnataka. See Exhibit 12 for the location of mines and plants. JSW expected
substantial savings to the tune of INR 1500-2000/tonne in transportation costs if it could feed
Ispat’s iron ore requirement from Bellary mines. Since JSW was already operating in the area, it
didn’t foresee any problems in the increased sourcing from the Bellary region. However, there
was little possibility of getting volume discounts from iron ore suppliers since most purchases
were being made at the prevailing market price.
Pellet: Ispat used to import pellets. JSW’s Vijaynagar plant was under expansion and was
expected to have excess pellets for next two years. As part of a new 3.2 mtpa expansion project,
a pellet plant was expected to be operational between March-June 2011. A potential benefit of
the acquisition would be that excess pellets produced at Vijaynagar could be sold on an arm’s
length price to Ispat’s Dolvi unit. Substituting imported pellets would result in savings of USD
20-25/tonne (INR 900-1125/tonne).
Coke: Dolvi was importing 100% of its coke requirement. Unlike pellet, Vijaynagar did not have
surplus coke facilities. There were a number of coke oven batteries in India where coal could be
given for conversion to coke. Jindal Stainless, a sister company in the O. P. Jindal Group,
managed by Mr. Ratan Jindal, brother of Sajjan Jindal, had a coke oven plant in Orissa but its
steel plant was yet to be commissioned. It was thought that instead of importing coke from
China or Japan to Dolvi, JSW could import coal through ports in or near Orissa, provide it to
Jindal Stainless for conversion to coke and then send the coke to Dolvi by inland or coastal
shipping. This could potentially save USD 20-25/tonne (INR 900-1125/tonne).
Power: Dolvi was buying electricity from the Maharashtra State Electricity board (MSEB) at a
rate of ~ INR 5.50 per kilowatt hour (kWh). JSW Energy, a group company, had a 1200 Mega
Watt (4X300 MW) coal-based power plant in Ratnagiri. The Ratnagiri power plant was
commissioned in 2009 and it was selling power in the merchant market. If the acquisition
succeeded, it was envisaged that Dolvi would buy power from JSW Energy instead of MSEB.
This arrangement could be on a cost+20% ROE basis. With this arrangement, the power would
be INR 1 per kWh cheaper than that from the state electricity board. To enforce this
10 Dolvi was one of only three steel plants in India which were located on the coast, the other two being Vizag (SAIL)
and Hazira (Essar).
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arrangement, the merged entity would have to obtain a No Objection Certificate (NOC) from
MSEB.
Logistics: Vijaynagar was sending HRC to Vasind and Tarapur while Dolvi was sending HRC
to Kalmeshwar (near Nagpur) for finishing. If the acquisition succeeded, it was envisaged that
Tarapur and Vasind could start sourcing HRC from Dolvi while Kalmeshwar could source it
from Vijaynagar. This arrangement was expected to result in significant freight savings. Dolvi
was incurring an extra freight of INR 1500/tonne for selling products in the southern market.
After merger, it was expected that Dolvi would serve the Maharashtra market and the
Vijaynagar plant would cater to the requirement of the southern market. Freight was a big area
of synergy and a low hanging fruit – no regulatory approval from government had to be
obtained.
Tax savings: The state of Maharashtra had formulated policies to attract investment in
backward areas by allowing companies to avail exemption from sales and value added tax
(VAT). However in 2007-08, the policy was amended and instead of getting exemption,
companies now could defer tax payment for 14 years. As per the modified policy, a company
could collect VAT from its customers but choose not to pay it to the government for next 14
years. After the holiday period of 14 years, they had to pay it in 5 equal annual installments.
Another option under the same scheme was to pay upfront the net present value of VAT
payments over 14 years (this was approximately 18% of the VAT liability). The VAT rate was
5% if the products were sold within the state of Maharashtra as opposed to 2% if sold outside
the state.
In 2010, Ispat was selling 24% of its produce outside Maharashtra and 71% within the state, the
rest being exports. If the acquisition succeeded, JSW was thinking of supplying steel to its
Tarapur and Vasind finishing plants from Dolvi. This would give dual advantage to JSW. First,
it would save freight cost as the plants were fed from Vijaynagar plant. Second, Dolvi would
benefit from the 5% VAT concession on 100% of its sales. This was a clear area of synergy and
specific possible for only JSW, as at that point in time, no other company interested in the
acquisition (Tata Steel, JSPL etc.) had downstream processing facilities within Maharashtra.
Labour: Ispat had a labour union which JSW would inherit if the acquisition would go through.
The union was part of ‘Bhartiya Kaamdar Karamchari Mahasang’. In its entire history, JSW
never had any union. JSW believed in taking care of its employees and had very attractive
employee welfare schemes. Its plant in Bellary was one of the few in India that paid production
incentive bonus to even outsourced and contract workers. The company had also constructed a
township for its outsourced workers and had excellent sports complex and other recreation
facilities. JSW had never delayed salaries for its employees even by one day.
Management style: The two companies had very different management styles. Ispat was more
of a technology/process focused company. It had cutting edge technology and the interlinked
structure of the plant necessitated good team work. It had implemented an ERP system from
SAP, while JSW was yet to do so. The focus of Ispat management was on processes, yields, etc.
The Dolvi plant was consistently rated by SMS Siemag, the CSP technology supplier, as one of
the best in the world in terms of productivity and maintenance. However, the top management
of Ispat had leveraged Dolvi plant for a string of international investments. In contrast, the top
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management of JSW was aggressively pursuing growth by reinvesting profits. It believed in and
followed a growth strategy based on the principle of ‘Create supply, demand will follow’. For
example, JSW had not undertaken a single market study after 2004. The studies JSW did
undertake till 2004 only made it realize that extrapolation of past data to analyse future demand
was misleading in the Indian steel sector. For example, when JSW was thinking of setting up a
Colour Coated and Galvanizing line, most people surveyed believed that a market for colourcoated sheets did not exist in India as the product was ‘very expensive’. Despite being advised
against going for this project, the company went ahead with the decision. The launch was
successful and customers’ response was overwhelmingly positive. Since then, these capacities
were running at full utilization and JSW was running short of capacity for these products. Mr.
Prashant Jain, Head – Corporate Strategy and Development at JSW, remarked that JSW was a
nimble footed organization despite its large size. The company has always taken a futuristic
approach towards running business and taking proactive action in line with anticipations about
the environmental trends. He added:
JSW had been able to act upon things earlier in the curve as opposed to other
organizations in terms of long-term sustainability. For example, in 2006 it started
working on beneficiation plants. The way iron ore was being exported; the
organization could see that in future high-grade ore would not be available in the
country. It started to work on setting up a facility to beneficiate low grade iron
ore to a higher grade even though it was considered to be an alien thought in
India at that time.
Projects: There were several capital projects in the pipeline in Ispat and JSW would either have
to scrap or expeditiously finish them. This decision would depend upon JSW’s strategy for the
company.
THE ACQUISITION DECISION
Many companies were interested in acquiring Ispat. A manager associated with the acquisition
deal said that companies such as JSPL, headed by Mr. Naveen Jindal (brother of JSW promoter
Sajjan Jindal) and based out of Delhi, had done its due diligence. Arcelor Mittal, promoted by
Mr. Lakshmi N. Mittal, brother of Mr. Vinod and Pramod Mittal had also done its due diligence
as it had long been trying to have a foot-print in India. He further added that JSW and Tata Steel
India emerged as the front-runners for sealing the acquisition and the market grapevine
suggested that Tata Steel India was asking the lenders to ‘take a haircut’ and restructure their
loans.
For Mr. Sajjan Jindal, while the acquisition was an opportunity to inch closer towards realizing
JSW’s vision of being a 40 mtpa company by the next decade, he was cognizant of the fact that
identification of synergies was only the first step in an acquisition process. The most complex
aspects of an acquisition were often hidden. Could it be that this acquisition may throw up
unpleasant surprises or the external environment could change drastically? Should JSW take
heed of the experience of Stemcor with this acquisition and be conservative in its valuation?
Should JSW ask lenders for a haircut like Tata Steel did? Should JSW be aggressive in lapping
up Ispat when everyone all around was skeptical of the viability of a plant that had been closed
down for more than a month? The time had come for a decision.
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Exhibit 1
Total Crude Steel Production of Leading Steel Producing Countries
Country
2005
2006
2007
2008
(in Million Tonnes)
2009
2010
China
355.79
421.02
489.71
512.34
577.07
638.74
Japan
112.47
116.23
120.20
118.74
87.53
109.60
USA
94.90
98.56
98.10
91.35
58.20
80.50
India
45.78
49.45
53.47
57.79
63.53
68.98
Russia
66.15
70.83
72.39
68.51
60.01
66.94
South Korea
47.82
48.46
51.52
53.63
48.57
58.91
Germany
44.52
47.22
48.55
45.83
32.67
43.83
Ukraine
38.64
40.89
42.83
37.28
29.86
33.43
Brazil
31.61
30.90
33.78
33.72
26.51
32.95
Turkey
20.97
23.32
25.75
26.81
25.30
29.14
2010 (P)
(in Kgs)
CAGR (%)
(2005-10)
Source: World Steel Association Data.
Exhibit 2
Per Capita Finished Steel Consumption
Country
2005
2006
2007
2008
2009
China
266.0
287.4
319.6
326.9
409.4
427.4
12.40
South Korea
981.6
1042.6
1144.1
1210.7
936.1
1077.2
1.50
Japan
601.6
619.5
637.0
612.1
415.6
502.9
(-) 3.00
USA
356.5
400.9
358.5
323.6
192.7
258.2
(-) 7.10
Russia
204.9
245.8
285.5
251.7
178.1
256.2
5.70
Ukraine
118.4
142.5
173.9
149.5
86.6
121.0
(-) 0.10
Germany
427.7
475.6
518.4
514.3
342.7
440.8
0.03
India
36.6
41.2
45.8
45.1
47.8
51.7
7.80
P = Provisional
Source: World Steel Association.
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Exhibit 3
Producer Group Wise Production of Crude Steel
(in Million Tonnes)
Producer/Group
1. Main Producer
SAIL
RINL
TATA STEEL
TOTAL (1)
2. Major
JSWL
ISPAT
ESSAR
JSPL
TOTAL (2)
3. Other Producer
EAF Units/COREX-BOF
INDUCTION FURNACE
TOTAL (3)
GRAND TOTAL (1+2+3)
2006-07
13.51
3.50
5.17
22.18
Production of Crude Steel
2007-08
2008-09
2009-10
13.96
13.41
13.51
3.13
2.96
3.21
5.01
5.65
6.56
22.10
22.02
23.28
2010-11 (P)
13.76
3.24
6.86
23.85
2.64
2.76
3.01
8.41
3.15
2.83
3.56
9.54
3.22
2.20
3.34
1.46
10.22
5.26
2,69
3.47
1.96
13.38
5.85
2.38
3.37
2.27
13.87
4.84
15.39
20.23
50.82
5.28
16.93
22.21
53.86
8.15
18.05
26.20
58.44
9.36
19.82
29.18
65.84
9.79
22.07
31.86
69.58
P = Provisional
Source: Report of the Working Group on Steel Industry for the Twelfth Five Year Plan (2012-2017); Ministry of Steel;
Planning Commission.
Exhibit 4
Production and Consumption of Crude and Finished Steel in India
Total Finished Steel (alloy + non-alloy) (mtpa)
Year
Production for
Import
Export
Consumption
2005-06
46.57
4.31
4.80
41.43
2006-07
52.53
4.93
5.24
46.78
2007-08
56.08
7.03
5.08
52.13
2008-09
57.16
5.84
4.44
52.35
2009-10
60.63
7.38
3.25
59.34
Source: Ministry of Steel Annual Reports
Crude Steel (mtpa)
Capacity
Production
51.17
46.46
56.84
50.82
59.85
53.86
66.34
58.44
75.00
65.84
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Exhibit 5
JSW Steel, Balance Sheet 2009-10
(in INR crores)
SOURCES OF FUNDS
Shareholders' Funds
Share Capital
Reserves and Surplus
Loan Funds
Secured Loans
Unsecured Loans
Deferred Tax Liability
TOTAL
APPLICATION OF FUNDS
Fixed Assets
Gross Block
Less: Depreciation
Net Block
Capital Work-in-Progress
Investments
Current Assets, Loans and Advances
Inventories
Sundry Debtors
Cash and Bank Balances
Loans and Advances
Other Current Assets
Less: Current Liabilities and Provisions
Liabilities
Provisions
Net Current Assets/(Liabilities)
TOTAL
Source: JSW Steel Annual Report 2009-10
As at
March 31, 2010
As at
March 31, 2009
527.11
9179.23
9706.34
537.01
7422.24
7959.25
8987.51
2597.59
11,585.10
1964.95
23256.39
8214.61
3058.02
11272.63
1421.16
20,653.04
21,795.58
4,929.44
16,866.14
6,684.27
23,550.41
1,768.35
16896.75
3,810.31
13,086.44
9,242.06
22,328.50
1,250.11
2,585.77
563.25
287.11
2,123.39
5,559.52
2051.42
398.14
419.96
1,744.88
17.24
4,631.64
7,357.67
264.22
7,621.89
(2,062.37)
23,256.39
7,476.28
80.93
7,557.21
(2,925.57)
20,653.04
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Exhibit 6
JSW Steel, Profit and Loss Account 2009-10
(in INR crores)
INCOME
Domestic Turnover
Export Turnover
Sale of Carbon Credits
Less: Excise Duty
Net Turnover
Other Income
Total Income
EXPENDITURE:
Materials
Employees Remuneration and Benefits
Manufacturing and Other Benefits
Interest and Finance Charges (Net)
Depreciation
Profit before taxation and Exceptional Items
Exceptional Items
Exchange Loss
Profit before Taxation
Provision for Taxation (including wealth tax)
Profit after Taxation
Profit brought forward from earlier years
Amount available for Appropriation
Appropriations:
Transfer (to)/from Debenture Redemption Reserve
Transfer to Capital Redemption reserve
Dividend on Preference Shares
Proposed Final Dividend on Equity Shares
Corporate Dividend Tax
Transfer to general Reserve
Balance carried to Balance Sheet
Earnings per share
(Equity shares, par value of INR 10 each) (in INR)
Basic
Diluted
Source: JSW Steel Annual Report 2009-10
Year ended
March 31, 2010
Year ended
March 31, 2009
16460.61
2935.82
60.21
19456.64
1254.16
18202.48
532.84
18735.32
10680.50
4450.21
48.58
15179.29
1178.04
14001.25
259.56
14260.81
10460.68
365.20
3103.70
862.68
1123.41
15915.67
2819.65
8450.10
288.75
2429.29
797.25
827.66
12793.05
1467.76
2819.65
796.91
2022.74
3883.15
5905.89
790.13
677.63
219.13
458.50
3505.86
3964.36
(125.00)
(9.90)
(28.92)
(177.70)
(34.31)
(202.28)
5327.78
20.45
(28.99)
(18.71)
(8.11)
(45.85)
3883.15
106.34
105.94
22.70
22.70
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Exhibit 7
Financial highlights of JSW Steel and Ispat Steel from 2005 to 2010
JSW Steel
2005-06
2006-07
2007-08
2008-09
2009-10
6,215.53
8,554.36
11,420.00
14,001.00
18,202.00
Net Profit after tax
856.54
1,292.00
1,728.19
459.00
2,023.00
Debt-Equity Ratio
0.96
0.73
0.93
1.24
1.07
3,877.00
3,925.00
7,135.00
9,857.00
10,337.00
Net Turnover
Adjusted Long Term Debt
Source: JSW Steel annual reports.
Ispat Industries Limited
2005-06
2006-07
2007-08
2008-09
2009-10
5,686.300
8,417.506
8,478.705
9,181.29
11,079.40
Net Profit after tax
-812.67
-9.53
34.80
-688.11
-322.34
Debt-Equity Ratio
13.66
13.88
11.65
9.04
14.69
Sales Turnover
Source: Ispat Steel annual reports.
Tata Corus
Usiminas
Severstal
Gerdau
7
8
9
10
Tata Corus
Blue-Scope
BaoSteel
JSW Steel
Nucor
CSN
Severstal
Novolipetsk
SAIL
POSCO
Jan-10
Blue-Scope
CSN
JSW Steel
Arcelor Mittal
Tata Corus
Nucor
Novolipetsk
BaoSteel
POSCO
Severstal
Nov-09
EZZ Steel
SDI
JSW Steel
Tata Corus
Nucor
Novolipetsk
ArcelorMittal
BaoSteel
POSCO
Severstal
Jun-09
EZZ Steel
SDI
JSW Steel
Tata Corus
Nucor
Novolipetsk
ArcelorMittal
BaoSteel
POSCO
Severstal
Jan-09
EZZ Steel
SDI
JSW Steel
Tata Corus
Nucor
Novolipetsk
ArcelorMittal
BaoSteel
POSCO
Severstal
Jun-08
EZZ Steel
SDI
JSW Steel
Tata Corus
Novolipetsk
Nucor
ArcelorMittal
BaoSteel
POSCO
Severstal
Jan-08
Exhibit 8
World Steel Dynamics’ World-Class Steelmakers Ranking History
EZZ Steel
JSW Steel
SDI
Tata Corus
Novolipetsk
Nucor
ArcelorMittal
BaoSteel
POSCO
Serverstal
Dec-07
BlueScope
CSN
JSW Steel
SDI
Tata Corus
Nucor
ArcelorMittal
BaoSteel
POSCO
Serverstal
Jun-07
A00167
Source: World Steel Association
Between November 2009 and June 2010, JSW Steel had consistently scored a perfect 10 on the factors of Expanding capacity, Location in high growth markets,
Conversion costs; Yields and Labour costs. It remained at 1 on Dominance in mature markets and 9 on Environment and safety. Its score on Size had decreased
from 4 to 3. Location to procure raw material score had decreased from 8 to 7 and Profitability had increased from 5 to 7. When comparing Weighted-Average
score, in November 2009, JSW Steel stood in the 7th place with a score of 7.17 while the top scorer Severstal (Russia, USA and EU) obtained 7.81. In June 2010
JSW Steel stood in the 2nd place with a score of 7.30 while the top scorer POSCO obtained 7.53.
World Steel Dynamics is an independent, global steel consulting company that ranks top 35 steel companies on multiple parameters every year. Above is a history
of WSD ratings of top 10 firms based on Weighted-Average scores. The companies were rated on a scale of 1 to 10 (with 1 being least favorable and 10 being
most favorable) on the following parameters with each parameters weight indicated in brackets: Size (6%), Expanding capacity (6%), Location in high-growth
markets (6%), Dominance in mature markets (4%), Downstream businesses (4%), M&A, Alliances and JVs (6%), Harnessing tech revolution (6%), Environment
and safety (4%), Country risk factor (6%), “Pricing Power” with large buyers (6%), Threat from nearby competitors (4%), Conversion costs; yields (5%), Costcutting efforts (4%), Iron ore mines (3%), Coking coal mines (3%), Location to procure raw materials (3%), Labor costs (4%), Skilled and productive workers (3%),
Liabilities for retired workers (3%), Energy costs (4%), Profitability (4%) and Balance sheet (3%).
CSN
SAIL
4
Novolipetsk
Nucor
3
6
JSW Steel
2
5
POSCO
Jun-10
1
#
15 of 19
16 of 19
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Exhibit 9
Ispat Industries Limited, Balance Sheet 2009-10
(in INR crores)
As at
June 30, 2010
As at
March 31, 2009
2225.09
18.83
1471.00
3714.92
2272.51
51.98
1544.48
3868.97
7156.90
24.85
7181.75
10896.67
7151.28
200.24
7351.52
11220.49
13456.02
5528.67
7927.35
63.73
13557.39
4669.58
8887.81
98.52
-
4.19
7991.08
229.37
964.28
2.08
8990.52
232.89
950.13
4.94
1934.17
758.97
203.06
796.87
3693.07
1382.93
564.18
79.39
927.33
2953.83
4080.93
36.51
4117.44
Net Current Assets
(424.37)
6 Profit and Loss Account Debit Balance
2134.23
TOTAL
10896.67
The financial year was extended to a 15 month period ending on June 30, 2010.
3708.97
35.00
3743.97
(790.14)
1832.15
11220.49
SOURCES OF FUNDS
1 Shareholders' Funds
Share Capital
Application Money towards Equity Warrants
Reserves and Surplus
2
Loan Funds
Secured Loans
Unsecured Loans
TOTAL
APPLICATION OF FUNDS
1 Fixed Assets
Gross Block
Less: Depreciation
Net Block
Capital Work-in-Progress
Pre-operative and Trial Run Expenses
(Pending Allocation)
2
3
4
Investments
Deferred Tax Asset (Net)
Foreign Currency Monetary Items Difference Account
5
Current Assets, Loans and Advances
Inventories
Sundry Debtors
Cash and Bank Balances
Loans, Advances and Deposits
Less: Current Liabilities and Provisions
Current Liabilities
Provisions
Source: Ispat Steel Annual Report
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Exhibit 10
Ispat Industries Limited, Profit and Loss Account 2009-10
(in INR crores)
INCOME
Sales (Gross)
Less: Excise Duty
Sales (Net)
Other Income
TOTAL (A)
EXPENDITURE
Decrease/(Increase) in stocks
Excise Duty & Cess on stocks
Raw Materials Consumed
Personnel Cost
Manufacturing, Selling & Distribution and
Administrative Expenses [Including Prior Period
expenses INR 3.56 crores (INR 10.97 crores)]
Interest
Depreciation
Less: Transfer from Revaluation Reserve
TOTAL (B)
Profit/(Loss) before Tax and Exceptional Items (A-B)
Add: Exceptional Items
Profit/(Loss) before Tax
Less:
Provision for Wealth Tax
Deferred Tax Charge (Credit)
Fringe Benefit Tax
Profit/(Loss) after Tax
Less:Debenture Redemption Reserve written back
Add: Loss brought forward from Previous Year
Add: Adjustments
(a) Towards Exchange Differences of 2007-08
transferred to Fixed Assets (Net of
Depreciation INR 6.44 crores and
deferred tax credit of INR 63.23 crores)
(b) Towards Exchange Differences of 2007-08
transferred to Foreign Currency Monetary
Item Translation Difference Account
(Net of amortisation INR 1.48 crores and
deferred tax credit of INR 1.52 crores)
Loss carried to Balance Sheet
Basic and Diluted Earnings per Share (INR)
[Nominal value of shares INR 10 each]
April'09-June'10
(15 Months)
2008-2009
(12 Months)
10983.14
850.41
10132.73
445.96
10578.69
9063.44
931.46
8131.98
405.86
8537.84
(269.53)
29.54
5895.25
273.36
105.05
(18.93)
4650.84
207.60
2927.13
2162.55
1285.45
876.28
102.33
773.95
10915.15
(336.46)
(336.46)
1159.30
728.10
81.48
646.63
8913.03
(375.19)
(648.70)
(1023.89)
0.03
(14.15)
(322.34)
20.26
(1832.15)
0.03
(338.81)
3.00
(688.11)
27.71
(1046)
-
(122.81)
-
(2.94)
(2134.23)
(3.37)
(1832.13)
(6.25)
The financial year was extended to a 15 month period ending on June 30, 2010.
Source: Ispat Steel Annual Report
6.8 mtpa
INR 25,878 crore
(2010)12
INR 5,047 crores
(2010)
Asia's first
integrated
private sector steel
company.
Capacity
Revenue11
INR 11,092 crore
(2010)13
INR 3,635 crore
(2010)
World’s largest
coal-based
sponge
iron manufacturing
facility.
USD 124.9 Billion (2008),
USD 65.1 Billion (2009)14
USD 9.4 Billion (2008), and
USD 0.118 Billion (2009)
Represented about 8% of
world
steel capacity. Only 4% of
ArcelorMittal capacity was in
Asia.
Crude Steel Production
73.2 mtpa (2009)
No plant in India.
2006
ArcelorMittal
Stemcor was one of the world’s largest independent
steel traders and was involved in supply chain
activities related to finance, provision of raw
materials, steel trading, logistics and distribution and
stockholding15.
Loss of 26 Million GBP (2009)
15 http://www.stemcor.com/uploads/stemcorannouncesfullyearauditedresults2009.pdf
ArcelormittalReportsFullYearAndFourthQuarter2009Results.pdf
14 http://corporate.arcelormittal.com/~/media/Files/A/ArcelorMittal/news-and-media/press-releases/2010/February/EN-
13 http://www.jindalsteelpower.com/img/admin/financial_reports/results/Financial_Q4_2010.pdf
12 http://www.tatasteel.com/investors/annual-report-2009-10/annual-report-2009-10.pdf
A00167
No plant in India. Acquired Aryan Mining and
Trading Corporation, an iron ore and manganese
mine in Orissa, in 2008.
Did not own steel producing plants. Traded 6.3
million tonnes of raw materials and 6.2 million
tonnes of finished steel in 2009.
Turnover of GBP 3.54 Billion (2009)
1951
Stemcor
11 Tata Steel and JSPL data are for FY ending March 31, 2010 while ArcelorMittal and Stemcor are for FY ending December 31, 2009.
Source: Authors Analysis
Profit after
Tax
Description
Raigarh
(Chhattisgarh)
Jamshedpur
(Jharkhand)
3 mtpa
1979
Year of
Establishment
Plant Location
in India
JSPL
Exhibit 11
Snapshot of other firms interested in Ispat acquisition
Tata Steel
1907
18 of 19
Created in Google Maps
19 of 19
Exhibit 12
Location map – JSW and ISPAT assets
A00167