‘Prized Catch’ Ispat Weighs Heavy on JSW

As Ispat's losses mount, analysts blame the haste Sajjan Jindal showed in wrapping up the deal for some of his current financial problems

Steel magnate Sajjan Jindal's financial troubles are spreading. Already burdened by the woes of iron ore sourcing, the Mumbai-based billionaire and promoter of JSW Steel is now realising that his acquisition of Ispat Industries is not quite turning out to be the "prized" catch it was once touted to be. 

Jindal had cut the deal for Ispat with brothers Pramod and Vinod Mittal at lickety-split. The . 2,157-crore transaction was sealed in just a week in December 2010, surprising other suitors like Tata Steel. Jindal had then promised shareholders of Ispat that he would revive the loss-making company's fortunes in less than 18 months. He could not keep his word as new problems kept creeping up with Ispat's financials. 
Already struggling to live up with several "unviable" decisions of Ispat's previous board, Jindal is now finding his hands full with the Maharashtra-based steelmaker's "sticky assets". 
"We have made a provision of . 1,292 crore for sticky assets in Ispat," JSW's joint managing director Seshagiri Rao told ET. "These include advances to group companies, receivables, overseas investments and for old power equipment." Vinod Mittal, a director on Ispat board, did not respond to calls from ET. 
With Ispat's losses mounting—the company slumped to a net loss of . 1,806 crore in the year to March 2011 and . 308.6 crore in the quarter to December — Jindal is getting ready to loosen his purse strings yet again. 
JSW is drawing up a . 2,000-crore plan to turn the clock back at Ispat. The fund injection, via the equity route, would be in a special purpose vehicle (SPV) and not in the steelmaker directly. This will ensure that JSW's stake in Ispat does not rise beyond the current 47%, firewalling Jindal's flagship company from the losses of the acquired entity. 
"Ispat's operating profit for every tonne of steel made in the quarter to December was about . 3,600, which is far less than the . 6,500 that JSW Steel earns," said a Mumbai-based analyst. "If JSW's holding goes beyond 50%, then the accumulated loss of Ispat would also have to be accounted for in the consolidated statement. This would reduce JSW's operating profit." JSW posted a consolidated net loss of . 47.9 crore on account of the losses in Ispat. This was after considering . 500 crore as exceptional item on account of a forex loss. Under the turnaround plan, JSW will invest . 700 crore as equity in Amba Coke, an SPV that will sell coke and pellets to Ispat. The SPV will raise . 1,300 crore in debt, insulating JSW from any future concerns on account of Ispat. 
Amba Coke, which already has environmental clearances, will bring in cheaper coking coal for Ispat. The SPV was earlier formed with global trading major Stemcor and has a long-term agreement for sourcing coking coal from Australia. The unit will also generate captive power for Ispat, besides sourcing power from JSW Energy. This will bring down Ispat's operating cost. 
Analysts blame the haste Jindal showed in wrapping up the deal for some of his current problems. "JSW had been looking for acquisitions in India to scale up and Ispat seemed the perfect fit," said Jagdish Agarwal of Mumbai-based Emkay Global Financial Services. "Since the deal was completed swiftly, some of the items in the due diligence were not captured." The deal was more between Jindal and the Mittal brothers. 
Among the pitfalls was the . 104.8-crore worth of raw material that Ispat had procured against aletter of credit. The raw material has been lying in transit overseas with a stevedore since March 2010. Then there were investments, loans and advances aggregating to . 118.4 crore for development of mines, and sales of hot rolled coils worth . 319.4 crore that the purchasers had refused to pay for.