Jindal Strips has joined the race for Steel Authority of India's (SAIL) Salem Steel plant. SAIL, which has put its Special Steel group on the block, has also evoked the interest of the LNM Group, Avesta Sheffield and Gama Synergy. This has been reported by a leading national daily.
SAIL is the world's 10th largest and India's largest steel manufacturer. It operates 4 integrated steel plants and 2 speciality steel plants. The company has been on the brink of bankruptcy for some time now. It is attempting to raise resources by getting rid of its loss making units.
The synergies between the two companies are apparent. While Jindal Strips is a market leader (market share 40%), Salem has only a 5% share in the domestic markets. Salem is strong in the exports markets, while Jindal Strips is trying to break into it. Another factor in favour of the acquisition is that Jindal Strips could supply raw material to Salem, thus reducing the latter's exposure to currency risk. An acquisition would prove to be beneficial to both the companies.
However, what needs to be looked into is whether the acquirer will be able to bring in large resources and new technology. On both counts, Jindal Strips would not score over the competitive bidders. Moreover, with Jindal group itself emerging from a recession, which has hurt overall financial strength, it may be unable to sustain the burden of additional capital that will be required to finance the acquisition.
The stock is rated as a 'SELL' due the company's low employee productivity and the outdated technology. Moreover, with the steel demand yet to show a definite uptrend, analysts are skeptical of a turnaround in the near future.
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