JSW Steel Vijayanagar Plant’s First Phase To Begin In September 2013

According to media reports, JSW Steel will be commissioning the first phase of its new 2.3 million tonnes plant located at Vijayanagar, which will be operational by September 2013. The new plant will produce high grade automotive steel. It has developed technical collaboration with Japan's JFE steel corporation who is also the second largest shareholder in the company. As on December 31, 2012, JFE holds 15% stake in the company.

The cost of the new plant is around Rs 4025 crore which would be funded in a mix of debt and equity. The reports further suggest that the debt to equity ratio would be in the range of 2:1, which implies that around Rs 2700 crore would be raised through debt while the remaining will be raised through internal accruals. As of FY2012, on a consolidated basis, the total debt of the company stands at around Rs 14200 crore with the debt to equity ratio stands at around 0.85x. This has grown in the nine month period of FY13, with the ratio standing at 1.15. We believe that the raising of debt of around Rs 2700 crore would again push the debt levels higher resulting into higher interest outgo impacting the bottomline of the company.

By September 2013, company will start its first phase and the proposed capacity is expected to be 1 million tonnes. The reports added that the remaining 1.3 million tonnes of capacity would be commissioned in 2014, approximately taking an year from phase 1 of the operations. The plant will produce cold rolling mills which will be targeted in the niche market segment namely automobile steel which is mainly used in making body parts of cars and SUVs. The demand for this kind of products is high (around 8 to 10 million tonnes) and most of it is met through imports. Hence we believe that the company's focus on such niche area which has a high demand, and would surely benefit the company. However, the real impact of the same could be seen in the second half of 2014.

For one's reference, JSW steel had posted a lackluster performance in the December 2012 quarter. On a consolidated basis, its net sales increased by 5.5% to Rs 8866 crore on a YoY basis. However, the company posted a net loss of Rs 74 crore which widened against a loss of Rs 48 crore in a similar period last year. This was majorly after the dismal numbers of its subsidiary JSW Ispat Steel which posted a loss of Rs 131 crore in the quarter.  The following table also shows us the trend of the last five months’ crude steel production of the company: