JSW Steel has entered into a definitive agreement to buy Welspun Maxsteel (WMSL) for an enterprise value of R1,000 crore plus net current asset (as on August 31, 2014) subject to regulatory approvals.
For the aforesaid consideration, WMSL offers an installed capacity of 0.9 mt gas-based DRI with captive jetty (2.5 mt capacity, 1.8 km from the plant), railway siding (35 km from the plant) and, importantly, 800 acres of land in proximity to JSW Steels existing Dolvi facility (40 km).
On asset-based valuation, we think its a fair deal and the transaction is more of a strategic move to do away with land acquisition issues related with greenfield project in the country. Besides, the locational advantage will help JSW cater to the export markets also.
Over years, JSW Steel has insulated its sales volumes by focusing on the export markets, which we expect to account for ~25-26% of its FY16e shipments.
However, the transaction is hard to justify on earnings. While the transaction looks fair from an asset based valuation perspective, one cannot ignore the operational issues with the WMSL facility as it is a gas-based DRI facility.