When Sajjan Jindal’s JSW Energy buys a power plant from younger brother Naveen Jindal’s debt-laden Jindal Steel and Power, it will not be the first time he will bail out a brother.
Even as JSW Energy agreed to buy JSPL’s 1,000-Mw power plant for an enterprise value of Rs 4,000 crore — Rs 6,500 crore if it secures fuel and power purchase — Sajjan Jindal has struggled to turn around his US steel assets acquired a decade ago to bail out his elder brother.
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In 2007, the Mumbai-based Sajjan Jindal had bailed out Prithvi Raj Jindal when he bought three steel mills in the US, controlled by his brother. JSW Steel bought a 90 per cent stake in a plate mill, double jointing and coating unit, and a pipe mill in the US for an enterprise value of $900 million.
JSW planned to sell its excess steel slabs from its Indian plant, convert them into pipes and sell them at $1,500-1,600 a tonne. ‘‘We hoped to do $800 million in revenues from the US operation in 2007-08 and $1.5 billion in 2008-09,” Jindal had said in a report in 2007.
The plate and pipe mills have been a drag on JSW Steel, largely because of poor demand in the US energy industry. In 2014-15, the plate and pipe mills operated at only 36 per cent and 10 per cent of their capacity, respectively, and JSW Steel (USA) reported a net loss of Rs 302 crore in 2014-15, marginally less than the Rs 329 crore net loss it suffered in 2013-14.
JSW executives did not respond to an e-mail, seeking comments for this report. But disclosures in JSW Steel’s balance-sheet reveal the US assets never made profits, except in the financial year they were acquired.
In 2014-15, JSW Steel reported net profits of Rs 2,166 crore, after considering exceptional item of Rs 396 crore. This included provisioning towards diminution in the carrying value of investments in JSW Steel (USA) of Rs 334 crore.
In November 2007, JSW Steel (Netherlands) had acquired three companies in the US: Jindal United Steel Corporation having 1.2 million tonnes (mt) slab feeding capacity, Saw Pipes USA having 0.55 mt pipe producing capacity and Jindal Enterprises having 0.55 mt double jointing capacity along with 0.35 mt of coating capacity, all of which are located in Baytown, Texas.
The plants are located in the heart of the US oil and gas industry located in the Gulf of Mexico. They enjoy the advantage of their own barge unloading facility and good rail and truck transportation facilities. JSW Steel (Netherlands) had formed a US subsidiary company called JSW Steel Holding (USA) which in turn had formed its own subsidiary.
It has not been a downhill ride all through though. The year after taking over, JSW Steel (USA) reported earnings before interest, depreciation, taxes and amortisation (Ebidta) of $74.63 million for six months ended September 30, 2008. The crash in oil prices to less than $ 40 per barrel forced several companies in the US to delay ongoing projects and hold back investments. JSW Steel (USA) had to cut down its production due to lack of demand from October 2008.
Besides, it had to take losses on writedown of inventories that year. Yet it reported a positive Ebidta of $12.23 million for the financial year ended March 2009. In 2009-10, JSW Steel disclosed it had a made a related-party transaction of Rs 54 crore with the US arm and sale of goods worth Rs 520 crore. The parent also extended guarantees of Rs 184 crore for the US subsidiary in 2009-10, but there is no reference to its financial performance that year.
In 2010-11, the parent again extended guarantees worth Rs 271 crore to the US subsidiary, which reported net losses of Rs 147 crore on a turnover of Rs 631 crore. It had liabilities of Rs 3,821 crore on assets of Rs 5,253 crore (this was written down in subsequent years).
In 2011-12, the operations of the plate and pipe mills improved and capacity utilisation improved to 36 per cent and 12 per cent, respectively. Till then, JSW had extended loans of Rs 1,948 crore to the US arm, besides the initial investment.
In 2012-13, the US operations were again impacted and capacity utilisation of the plate and pipe mills was only 35 per cent and 15 per cent, respectively. By now, JSW had committed Rs 3,156 crore in loans and guarantees.
In 2013-14, the US plate and pipe mill operations continued to be impacted by a challenging environment and operated at 39 per cent and eight per cent of their capacity, respectively. The US subsidiary had loans of Rs 2,007 crore and the parent extended guarantees of Rs 2,753 crore while assets were valued at Rs 4,663 crore, JSW disclosed in its annual report for 2013-14.
JSW Steel is a flat steel products maker; the US business it acquired was not directly related. If this acquisition were to take place today, many would question the price and the objective. With this in the backdrop, analysts may question the price JSW Energy has agreed to pay for JSPL’s power plant.