The Hindu Business Line : Jindal cos merger seen benefiting shareholders

SHAREHOLDERS of Jindal Vijaynagar Steel Ltd (JVSL) may feel somewhat let-down as valuations in the merger deal between JVSL and Jindal Iron and Steel Company Ltd (Jisco) seemingly tilt in favour of Jisco shareholders, but in a longer timeframe the merger is seen advantageous to the shareholders of both companies, analysts and company officials have said.

Citing a number of benefits that will accrue out of the merger, they said the most important rationale behind this move is to create a larger entity that will have the wherewithal to take on the downturn in steel prices when it comes.

JVSL has returned to profitability mode mainly because of an improvement in the prices of hot rolled (HR) coils. "Price upturn has had a substantial impact on improving JVSL's performance,'' Mr Sajjan Jindal, Managing Director, JVSL, and Chairman and Managing Director, Jisco, said.

As a standalone entity, JVSL with a presence in HR coils, is likely to face harsh times in the event steel prices commence their cyclical downturn. This is because HR coils are subject to more volatility, impacting realisations and margins.

In a combined entity, there is a possibility of better management of volatility of prices because of the wide product range spanning from iron ore to galvanised steel. Integration of operations wherein iron ore at a price of Rs 200 per tonne is converted to galvanised steel at a price of Rs 30,000 per tonne does help absorb intermediate volatility, according to Mr Jindal.

JVSL will also benefit from the stronger balance sheet of Jisco thereby helping in better debt management for the combined entity. The outstanding debt of the merged entity, which is to be named as Jisco, would stand at Rs 4,750 crore as on March 2004.

According to Mr Sheshagiri Rao M.V.S, Director (Finance), JVSL, an improvement in the debt-equity ratio would be faster in a merged entity thereby facilitating the company to raise funds at a low cost and save on interest cost.

"Though the share swap ratio has gone beyond the market expectation, it is a good deal for the shareholders,'' said Mr Nimish Shah, Managing Director, Fortune Financial Services. "This merger will make a second Tata Steel,'' he said.

According to another analyst, there are gains accruing to both the shareholders. In terms of book value, JVSL shareholders will gain, while on the earnings per share (EPS) factor, Jisco shareholders will gain.

In terms of the long-term prospects, consolidation is the most sensible move. The fine print of the deal does benefit JVSL shareholders, as its share capital is being reduced to bring the swap ratio to 1:1, said another analyst.

As for the Jindals, the merger will help in bringing down the cost of production. Currently, the cost stands at $190 per tonne. The plan is to bring it down to $130-$140 per tonne by 2006-07.

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