Merging subsidiary could hurt JSW Steel

JSW Steel could decline as an effect of its decision to merge its loss-making subsidiary JSW Ispat with itself to achieve better operational synergy and bring down costs. The shareholders of JSW Ispat Steel will get one share of JSW Steel for every 72 shares held. Besides, JSW Steel will issue 1.86 crore new equity shares, thereby increasing its outstanding shares to 24.17 crore and equity capital to Rs 242 crore from Rs 223 crore. JSW’s debt will effectively increase by about Rs 8,800 crore (including Rs 2,000 crore of acceptances, which in our view is quasi debt, while its equity will dilute by 8.3 per cent, said Edelweiss in a note.) Nomura believes that this merger at current levels would be negative for JSW Steel given JSW Ispat shares would ideally get a negative value owing to low profitability and high debt. Though JSW Steel already holds close to a 49.3 per cent stake in JSW Ispat, it did not get a negative value on account of this stake given JSW Ispat was a listed company.