Galvanized coiled steel sit in a storage area following manufacture. (Photographer: Jasper Juinen/Bloomberg)

Vedanta Is Getting Electrosteel Steels Cheap

Vedanta Ltd. is buying Electrosteel Steels Ltd. at cheaper than prevailing industry valuations and the deal will add value to its earnings, analysts said.

Billionaire Anil Agarwal’s mines-to-metals company, which now added steel to its businesses, holds an iron ore prospecting licence in Jharkhand. That makes the acquisition even more attractive as Electrosteel Steels’ plant is located in the same state, according to CLSA. But that’s subject to getting regulatory approvals and acquiring land. Value accretion could be higher if Vedanta is able to raise capacity of the mill to 2.5 million tonnes a year from the existing 1.5 MTPA, CLSA said in a note.

Vedanta’s resolution plan was approved by the National Company Law Tribunal after it emerged as the highest bidder. Electrosteel Steels was among the first 12 large corporate accounts that the Reserve Bank of India identified in June last year for resolution under the Insolvency and Bankruptcy Code. Vedanta will acquire a 90 percent stake by infusing Rs 1,805 crore in equity and Rs 3,515 crore via debt. The remaining 10 percent will be held by creditors and current shareholders of the insolvent steelmaker.

The funds received will be used by Electrosteel to fully settle over Rs 13,000 crore it owed lenders.

Valuations

Electrosteel Steels largely makes long steel products. Average Ebitda per tonne of its larger peers Steel Authority of India Ltd. and Jindal Steel and Power Ltd. is Rs 7,500. At these levels, enterprise value for the industry stands at 6 times the operating income.

Given its capacity of 1.5 MTPA, derived Ebitda for Electrosteel Steels is Rs 1,125 crore. At the total deal value of Rs 5,320 crore (debt + equity), valuations for the asset work out to 4.7 times the Ebitda, according to BloombergQuint’s calculations. That’s lower than the industry average.

At a relatively inexpensive $546 a tonne, the acquisition cost is significantly lower than $750 a tonne capex already incurred on the plant, according to Edelweiss Securities. It comes at a juncture when Electrosteel Steels existing product range is gaining traction, the brokerage said. “Vedanta’s acquisition has come at the right price and time.”

Impact On Leverage

Vedanta’s net debt stood at Rs 16,295 crore as of December. Ebitda is estimated to be Rs 30,400 crore for the year through March 2019, according to the consensus of analysts tracked by Bloomberg.

After Electrosteel Steels acquisition, another Rs 3,515 crore would be added to its debt. Its derived Ebitda, factoring in the potential earnings of Electrosteel Steels, would go up to Rs 31,525 crore for the financial year.

Which means, the post-deal leverage for Vedanta will be 0.6 times. While Vedanta is not strictly comparable with other metals companies since it produces everything from oil to zinc, it’s leverage is lower than JSW Steel Ltd. and Tata Steel Ltd.’s debt-to-Ebitda ratio of around 3.

Vedanta’s portfolio of resources business provides advantages of scale, diversification and strong balance sheet. “It’s balance sheet can support this acquisition,” JPMorgan said in a note. “However, steel businesses tend to get lower valuation multiples than base metals and pure mining companies given steel is more capital-intensive.”

How Does It Help Vedanta?

This acquisition marks Vedanta’s entry in the ferrous space and gives it a foothold in the niche ductile iron pipes used for water transmission and distribution, JP Morgan said. Vedanta has some iron ore leases in eastern India and the steel plant acquisition would strengthen the company’s bid for captive mines, it said.

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