Mumbai: Sajjan Jindal, JSW Steel Ltd’s vice chairman and managing director, will seek shareholder approval in June to increase promoter stake in the firm from 45% to 49.71%, the company said on Monday.
The board of directors on Monday approved the plan.
Staking claim: JSW Steel’s managing director Sajjan Jindal. Abhijit Bhatlekar/Mint
The steel maker proposes to issue 17.5 million warrants, which can be converted into equity shares within 18 months of their allotment. The move will add Rs2,100 crore to the balance sheet, said joint managing director and group chief executive officer Sheshagiri Rao M.V.S.
“The money will help us in our capex (capital expenditure) programme and also to reduce leverage, and pump in equity into the company to kick up the next phase of growth,” he said.
“Twenty-five per cent of the conversion price of the warrants is to be paid on the date of the allotment while the remaining 75% is payable on exercise of the conversion right,” the company said in a statement.
Analysts, however, said the increase in promoter stake could be the first step towards bringing in a strategic foreign partner.
“This move could mean that the company may raise money through a QIP (qualified instituional placement) or will join hands with a foreign company which could dilute promoter equity,” said Kisan R. Choksey, chairman of a domestic brokerage that bears his name.
He added that the proposal might also be a “pre-emptive move to keep promoter stake at current levels”.
In November 2009, JSW Steel had signed a non-exclusive agreement with Japan’s JFE Steel Corp., which included a mutual stock holding clause that allowed both firms to buy stakes in each other. Rao declined to comment on possible promoter stake sale to the Japanese company, calling news reports suggesting such a possibility as “speculative.”
“We announced a strategic collaboration with JFE in November which is known. The discussions are in progress,” he said.
On Monday, the steelmaker also announced a profit of Rs602.87 crore for the quarter ended 31 March, from a loss of Rs73.99 crore in the same period last year, as revenue rose 52% to Rs5,441.30 from Rs3,568.38 crore.
“This quarter we saw the highest ever production and sales for the company. Exports dropped but strong demand from the domestic market made up for it,” said Jayant Acharya, director, sales and marketing.
JSW Steel shares on Monday fell 0.53% on the Bombay Stock Exchange to close at Rs1,221 when the benchmark Sensex index shed 0.98% to 17,386 points.
Rao said the firm expects domestic demand to grow by double digits in the current fiscal that began on 1 April, something analysts said is important for the company to continue making profits.
The firm has a gross debt of Rs16,173 crore with cash worth Rs514 crore. Rao said the debt will likely increase to Rs20,000 crore by the end of 2010-11, “though cash from the increase in promoter stake will lower a part of the debt”.
“The high debt is a dampener on the return on equity, but as long as steel prices continue to increase, there won’t be problem,” said Abhilasha Satale, senior manager, research at Mumbai-based brokerage Techno Shares and Stocks Ltd.
She cautioned that high prices would not continue for too long because of slower demand in China and developed markets, which would pressure the return on equity.
However, Rao said the company will continue to need capital to achieve its long term target of increasing annual capacity to 32 million tonnes in 2020 from 7.8 mt currently.
JSW Steel plans to more than double its spending in fiscal 2011 to Rs7,000 crore to increase crude steel output by 17% to 7 mt. It also plans to double rolled long steel production to 1.80 mt and increase rolled flat steel production by 31% to 4.70 mt. Long steel is used in construction and infrastructure projects, while flat steel is used to make automobiles and electrical appliances.
The steel maker also said it would spend $100 million (Rs446 crore), including debt, to buy coking coal mines in West Virginia in the US.
“These mines have resources aggregating to 123 mt. The plan is to get 1 mt of coking coal in the first year which will go up to 3 mt in the third year,” Rao said. “We expect the first shipment from the mines to come in September or October this year.”