Friday, September 11, 2009


What’s the deal?


Small stake sale or big deal: Struggling to get a foothold in India, world steel major, Arcelor Mittal has entered into an agreement to acquire a 35% stake in a small re-rolling company, Uttam Galva. We think that this deal creates a new bench mark in both valuation and outlook for the Indian steel sector.


The assets – small re-rolling facility: Uttam Galva has 900kt of cold rolling capacity, 750kt of Galvanising lines and 90kt of colour coated capacity.

The valuation – very high: The deal price signifies a trailing valuation of 1.7x P/BV, 14.4x PER, and 7.9x EV/EBITDA. Even though it is just a rolling facility, it is being valued at EV/t of US$652. This compares with Tata Steel trading at EV/t of US$600.

Strategic rationale – entry in lucrative Indian market: The Indian market is one of the few fast-growing markets, which has a supply deficit. Arcelor Mittal’s own efforts to gain an entry through Greenfield projects have been unduly delayed due to land acquisitions and other issues. Uttam Galva mostly imports hot rolled coil for value addition. This gives Arcelor Mittal a ready market to sell its products. Also, it gets exposure to some upstream initiatives which Uttam Galva is pursuing.

Highlights difficulties in setting up large steel capacity: Both Posco and Arcelor Mittal have announced large steel projects of 12mtpa each. Even after 3–4years, and full support of the central government, these projects have hardly made any headway. The issues involved are allocation of resources, land acquisitions and environmental clearances.

Further opportunities – plenty: However, many small steel companies, like Electrosteel Casting, Monnet Ispat etc., have cornered large iron ore and coal resources and are pursuing large steel projects. This deal gives some visibility as to the possible valuation trend.


Maintain Outperform: The Indian steel market is the 2nd fastest growing steel market globally with cheap availability of iron ore making it ideal for steel production. We believe that domestic steel companies are better placed to grow given the issues faced by most multi nationals trying to enter the Indian market. Also, we believe any further consolidation attempts will lead to better value discovery. We maintain our Outperform on Tata Steel and JSW Steel.

To see full report: STEEL SECTOR