JSW Steel Ltd. (JSTL), India’s third- biggest producer, plans to raise $1 billion in overseas loans to cut interest costs and boost profit amid falling prices.
The funds will be used to pay rupee debt of JSW Ispat Steel Ltd. (JSWI) after absorbing the unit, which the parent company acquired almost two years ago, Group Chief Financial Officer Seshagiri Rao said in an interview. JSW Ispat, which has a debt of 70 billion rupees ($1.3 billion), pays about 11 percent interest, while JSW Steel pays 7 percent, he said.
“JSW Ispat remains a positive story for us and with reduced costs, it should show a turnaround,” Rao said by phone from Mumbai, where JSW Steel is based. “We are seeking the Reserve Bank of India’s approval to raise foreign loans.”
Curbs on iron ore mining and high interest costs have hindered JSW Steel’s effort to turn around the unit. Slowing demand and a decline in steel prices are prompting mills to try and cut borrowing costs and use lower-grade raw material. India’s steel demand is forecast to grow 5.5 percent this year and 5 percent next year, according to Worldsteel.
“The benefit from an overseas loan will depend on the rupee -- if it depreciates after the loan, the gains of lower rates may be limited,” said Prasad Baji, an analyst at Edelweiss Financial Services in Mumbai.
The rupee, which depreciated 15.8 percent in 2011, has gained 0.2 percent this year, according to data compiled by Bloomberg.
JSW Steel shares declined 2.4 percent to 747.10 rupees in Mumbai today. The stock has gained 47 percent this year, compared with a 20 percent increase in the benchmark Sensitive Index. (SENSEX)
The company cut prices by as much as 1,000 rupees a ton this month, Rao had said on Oct. 10 in New Delhi.
JSW Ispat returned to profit in the three months ended June 30, after posting losses for four straight quarters. Earnings in the three months ended June 30 were boosted by a tax writeback.
JSW Steel, controlled by billionaire Sajjan Jindal, plans to absorb JSW Ispat in a stock exchange to share freight, energy and raw material costs. The unit runs a 3.3 million metric ton mill in the western state of Maharashtra. The combined company will have a capacity of 14.3 million tons a year, making it the biggest Indian steelmaker after Tata Steel Ltd.
JSW Steel, which is running its biggest plant -- in the southern state of Karnataka -- at 80 percent capacity, aims to get all its iron ore and half its coking coal from its own mines, Rao said. The company currently buys all its raw material from outside.
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