JSW Steel’s Ispat Acquisition (C): The Turnaround Strategy

Abstract

JSW Steel has made the decision to retain Ispat, and attempt to resolve its many problems. JSW develops a comprehensive strategy to develop Ispat into a profitable subsidiary. To do this, many economic, management, and process changes had to be put into place, and JSW had to gain the confidence and support of its shareholders.

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Resources

Exhibit 1: Anticipated Merger Benefits and Salient Turnaround Initiatives

A. Merger Benefits and Synergies

The integration of JSW Ispat into JSW Steel is expected to bring significant strategic advantages with it, particularly alternative steel making technologies, ability to achieve swift capacity expansion, shore based facility and Pan India expansion of market reach. The merger completes the integration and aims to capture full value of the combination:

Scale and Strategic Diversification
  • Catapults JSW Steel to become one of India’s leading steel companies in terms of installed capacity.
  • Economies of scale.
Enhanced Market Reach & Location Advantages
  • De-risk single location upstream profile.
  • Leverage each other’s marketing and distribution platforms to expand market reach.
  • Reduce marketing, general and administration overheads via better utilization of infrastructure and elimination of redundancies.
Strong Technology Platform
  • House multiple modern steel-making technologies under one roof.
  • Enable flexible production processes.
Financial Benefits
  • Realize significant financial benefits via accelerated utilization of unabsorbed tax losses at JSW Ispat as well as optimal use of depreciation on further capital investments.
  • Improve JSW Ispat’s cost structure via faster implementation of several plant integration initiatives.
  • Potential to reduce cost of financing.
B. Salient Turnaround Initiatives

JSW Ispat has made significant progress in its turnaround journey since the acquisition by JSW Steel. A number of strategic and operational initiatives have been completed, and some are in progress:

  • JSW Steel assisted in better sourcing of key production inputs especially power supplies from JSW Energy leading to improved profitability.
  • Marketing strategies have been reworked leading to freight synergies and better realizations.
  • The complexity previously arising from the financial imbalance at JSW Ispat at the time of acquisition was removed through timely equity infusion, debt refinancing and rationalisation of working capital funding.
  • JSW Ispat was brought out of CDR through enhanced ability to pay interest. Currently, the company is EBITDA positive.
  • Commissioning of 55MW power plant, lime calcination plant and railway siding by June 2013 is expected to give significant benefits.
  • JSW Steel continues to sustain the turnaround through cost reduction initiatives in the form of setting up of 1 MTPA coke oven and a 4 MTPA pellet plant expected to be commissioned in FY 2014 to ensure dedicated supplies of these key inputs at competitive costs.

As a result of the above milestones, JSW Ispat is now stabilized and is poised to be profitable on completion of the above mentioned projects.

Source: JSW’s press release issued on September 1, 2012

Exhibit 2: Electricity Consumption

2008–09

2009–10

2010–11

2011–12

2012–13

Dolvi

     Electricity purchased (units in ‘000s)

1637039

2231972

1556256

1741154

NA

     Own generation (units in ‘000s)

67689

84657

61075

39399

NA

     Amount paid (in crores)

740.50

1142.90

864.15

1008.50

NA

     Rate/unit (Purchased)

4.52

5.12

5.55

5.79

NA

     Rate/unit (Produced), From Furnace oil

5.65

4.94

6.27

8.21

NA

JSW Vijayanagar Plant

     Cost of generation (own captive plant)

3.05

2.62

3.24

3.81

3.81

Estimated saving by replacing own generation from Furnace Oil to Captive power plant (in crores)

17.60

19.64

18.51

17.34

Source: Annual reports of JSW

Exhibit 3

Financial Performance of Ispat Steel

(in INR crores)

Year

Net Turnover

EBIDTA

PBT

PAT

2008–09

8131.98

1430.73

−1023.89

−688.11

2009–10*

10132.73

1722.94

−336.46

−322.34

2010–11

8226.64

649.46

−2150.53

−1805.88

2011–12

11104.11

1193.91

−1096.10

−317.00

2012–13**

8113.00

737.00

-

86.00

2013–14

Plant-wise data not available

(Blended EBIDTA: INR 4500, Dolvi’s EBIDTA> INR 8000)

*15 months from April 2009 to June 2010

**9 months from July 2012 to March 2013. Results merged with JSW Steel

Operational Data of JSW Ispat Steel

Year

Capacity Utilization

DRI (MT)

Hot Metal (MT)

HRC production (MT)

Total expenditure (INR crores)

Expenditure per ton of HRC (INR/Ton)

2009–10

80%

1.68

2.13

3.31

8855.75

26755

2010–11

-

1.21

1.35

2.20

7901.53

35916

2011–12

<80%

1.27

1.59

2.48

10335.16

41674

Financial Performance of JSW Steel

(in INR crores)

Year

Net Turnover

EBIDTA

PAT

2008–09

14001.25

3092.67

458.50

2009–10

18202.48

4805.74

2022.74

2010–11

23163.24

4856.17

2010.67

2011–12

32060.47

5630.80

1625.86

2012–13

38763.41

6308.82

1801.22

2013–14

44529.47

8782.59

1334.51

Source: Annual reports of Ispat, JSW Ispat Steel, and JSW Steel from 2008–09 to 2013–14

Exhibit 4: Ispat Balance Sheet 2009–10

(in INR crores)

As at June 30, 2010

As at March 31, 2009

SOURCES OF FUNDS

ShareholdersFunds

     Share Capital

2225.09

2272.51

     Application Money towards Equity Warrants

18.83

51.98

     Reserves and Surplus

1471.00

1544.48

3714.92

3868.97

Loan Funds

     Secured Loans

7156.9

7151.28

     Unsecured Loans

24.85

200.24

7181.75

7351.52

    TOTAL

10896.67

11220.49

APPLICATION OF FUNDS

Fixed Assets

     Gross Block

13456.02

13557.39

     Less: Depreciation

5528.67

4669.58

     Net Block

7927.35

8887.81

     Capital Work-in-Progress

63.73

98.52

     Pre-operative and Trial Run Expenses (Pending Allocation)

-

4.19

7991.08

8990.52

Investments

229.37

232.89

Deferred Tax Asset (Net)

964.28

950.13

Foreign Currency Monetary Items Difference Account

2.08

4.94

Current Assets, Loans and Advances

     Inventories

1934.17

1382.93

     Sundry Debtors

758.97

564.18

     Cash and Bank Balances

203.06

79.39

     Loans, Advances and Deposits

796.87

927.33

3693.07

2953.83

   Less: Current Liabilities and Provisions

       Current Liabilities

4080.93

3708.97

       Provisions

36.51

35.00

4117.44

3743.97

Net Current Assets

(424.37)

(790.14)

Profit and Loss Account Debit Balance

2134.23

1832.15

    TOTAL

10896.67

11220.49

The financial year was extended to a 15 month period ending on June 30, 2010.

Source: Ispat Steel Annual Reports

Exhibit 5: Ispat Profit and Loss Account 2009–10

(in INR crores)

April’09-June’10 (15 Months)

2008–2009 (12 Months)

INCOME

     Sales (Gross)

10983.14

9063.44

     Less: Excise Duty

850.41

931.46

     Sales (Net)

10132.73

8131.98

     Other Income

445.96

405.86

     TOTAL (A)

10578.69

8537.84

EXPENDITURE

     Decrease/(Increase) in stocks

(269.53)

105.05

     Excise Duty & Cess on stocks

29.54

(18.93)

     Raw Materials Consumed

5895.25

4650.84

     Personnel Cost

273.36

207.60

     Manufacturing, Selling & Distribution and Administrative Expenses [Including Prior Period expenses INR 3.56 crores (INR 10.97 crores)]

2927.13

2162.55

     Interest

1285.45

1159.3

     Depreciation

876.28

728.10

     Less: Transfer from Revaluation Reserve

102.33

81.48

773.95

646.63

     TOTAL (B)

10915.15

8913.03

Profit/(Loss) before Tax and Exceptional Items (A-B)

(336.46)

(375.19)

     Add: Exceptional Items

-

(648.70)

Profit/(Loss) before Tax

(336.46)

(1023.89)

    Less:

     Provision for Wealth Tax

0.03

0.03

     Deferred Tax Charge(Credit)

(14.15)

(338.81)

     Fringe Benefit Tax

-

3.00

Profit/(Loss) after Tax

(322.34)

(688.11)

     Less: Debenture Redemption Reserve written back

20.26

27.71

     Add: Loss brought forward from Previous Year

(1832.15)

(1046)

    Add: Adjustments

       (a) Towards Exchange Differences of 2007–08 transferred to Fixed Assets (Net of Depreciation INR 6.44 crores and deferred tax credit of INR 63.23 crores)

-

(122.81)

       (b) Towards Exchange Differences of 2007–08 transferred to Foreign Currency Monetary Item Translation Difference Account (Net of amortisation INR 1.48 crores and deferred tax credit of INR 1.52 crores)

-

(2.94)

Loss carried to Balance Sheet

(2134.23)

(1832.13)

Basic and Diluted Earnings per Share (INR)

(3.37)

(6.25)

[Nominal value of shares INR10 each]

The financial year was extended to a 15 month period ending on June 30, 2010.

Source: Ispat Steel Annual Reports

Exhibit 6: JSW Steel Balance Sheet 2009–10

(in INR crores)

As at March 31, 2010

As at March 31, 2009

SOURCES OF FUNDS

Shareholders’ Funds

     Share Capital

527.11

537.01

     Reserves and Surplus

9179.23

7422.24

9706.34

7959.25

Loan Funds

     Secured Loans

8987.51

8214.61

     Unsecured Loans

2597.59

3058.02

11,585.10

11272.63

Deferred Tax Liability

1964.95

1421.16

     TOTAL

23256.39

20,653.04

APPLICATION OF FUNDS

Fixed Assets

     Gross Block

21,795.58

16896.75

     Less: Depreciation

4,929.44

3,810.31

     Net Block

16,866.14

13,086.44

     Capital Work-in-Progress

6,684.27

9,242.06

23,550.41

22,328.50

Investments

1,768.35

1,250.11

    Current Assets, Loans and Advances

     Inventories

2,585.77

2051.42

     Sundry Debtors

563.25

398.14

     Cash and Bank Balances

287.11

419.96

     Loans and Advances

2,123.39

1,744.88

     Other Current Assets

-

17.24

5,559.52

4,631.64

Less: Current Liabilities and Provisions

     Liabilities

7,357.67

7,476.28

     Provisions

264.22

80.93

7,621.89

7,557.21

Net Current Assets/(Liabilities)

(2,062.37)

(2,925.57)

     TOTAL

23,256.39

20,653.04

Source: JSW Steel Annual Report 2009–10

Exhibit 7: JSW Steel Profit and Loss Account 2009–10

(in INR crores)

Year ended Mar 31, 2010

Year ended Mar 31, 2009

INCOME

     Domestic Turnover

16460.61

10680.50

     Export Turnover

2935.82

4450.21

     Sale of Carbon Credits

60.21

48.58

19456.64

15179.29

     Less: Excise Duty

1254.16

1178.04

Net Turnover

18202.48

14001.25

     Other Income

532.84

259.56

Total Income

18735.32

14260.81

EXPENDITURE:

     Materials

10460.68

8450.10

     Employees Remuneration and Benefits

365.20

288.75

     Manufacturing and Other Benefits

3103.70

2429.29

     Interest and Finance Charges (Net)

862.68

797.25

     Depreciation

1123.41

827.66

15915.67

12793.05

Profit before taxation and Exceptional Items

2819.65

1467.76

Exceptional Items

     Exchange Loss

-

790.13

Profit before Taxation

2819.65

677.63

     Provision for Taxation (including wealth tax)

796.91

219.13

Profit after Taxation

2022.74

458.50

     Profit brought forward from earlier years

3883.15

3505.86

     Amount available for Appropriation

5905.89

3964.36

Appropriations:

     Transfer (to)/from Debenture Redemption Reserve

(125.00)

20.45

     Transfer to Capital Redemption reserve

(9.90)

-

     Dividend on Preference Shares

(28.92)

(28.99)

     Proposed Final Dividend on Equity Shares

(177.70)

(18.71)

     Corporate Dividend Tax

(34.31)

(8.11)

     Transfer to general Reserve

(202.28)

(45.85)

Balance carried to Balance Sheet

5327.78

3883.15

Earnings per share (Equity shares, par value of INR10 each) (in INR)

Basic

106.34

22.70

Diluted

105.94

22.70

Source: JSW Steel Annual Report 2009–10

Exhibit 8

Share Price of Ispat Steel and JSW Ispat Steel From 2009 to 2013

Month

2009–10

2010–11

2011–12

2012–13

High

Low

High

Low

High

Low

High

Low

Apr

14.80

11.24

21.50

19.70

24.75

22.65

13.27

11.30

May

24.72

13.76

19.85

17.00

22.85

21.55

12.09

9.50

Jun

28.00

20.40

18.55

16.60

21.65

18.45

10.87

9.65

Jul

23.20

16.60

18.55

17.65

20.80

17.85

Aug

24.20

21.25

19.30

17.55

18.25

13.00

Sep

24.20

22.30

24.35

18.85

16.00

13.01

Oct

24.70

18.80

23.85

19.60

13.79

12.25

Nov

21.05

18.05

21.00

16.35

13.60

9.65

Dec

22.35

19.40

24.95

17.70

11.00

9.06

Jan

23.30

19.15

25.45

22.35

13.94

9.14

Feb

20.35

18.15

24.85

21.05

15.90

13.00

Mar

20.10

18.90

23.35

21.60

14.82

11.95

Share Price of JSW Steel From 2009 to 2013

Month

2009–10

2010–11

2011–12

2012–13

High

Low

High

Low

High

Low

High

Low

Apr

387.70

232.50

1300.00

1170.50

1015.00

915.00

771.90

665.00

May

596.00

345.80

1274.00

984.95

978.00

855.00

735.40

566.00

Jun

720.00

494.00

1118.30

1000.00

981.60

824.00

686.00

580.80

Jul

713.90

475.05

1231.00

1020.00

940.00

760.50

Aug

762.15

648.00

1169.80

1085.00

780.00

594.65

Sep

852.00

654.55

1344.20

1132.10

745.00

552.20

Oct

935.00

710.00

1400.00

1212.00

669.40

532.05

Nov

1039.00

652.00

1363.40

1095.00

717.00

536.00

Dec

1051.00

935.00

1240.00

1033.35

638.45

464.00

Jan

1205.95

932.00

1212.50

851.55

702.80

502.60

Feb

1109.00

937.50

945.45

752.00

885.00

671.80

Mar

1284.80

113.40

972.50

831.35

815.00

661.30

On May 3, 2013, Bombay High Court sanctioned a composite scheme of amalgamation and arrangement under the Companies Act 1956 amongst JSW Steel Limited, JSW Ispat Steel Limited, JSW Building Systems Limited, JSW Steel Coated Products Limited with effect from July 1, 2012, the appointed date.

Source: Annual Reports of Ispat, JSW Ispat Steel and JSW Steel

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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