JSW Steel Inks Development Agreement with West Bengal Government

JSW Steel Ltd has announced that the Company is currently operating a 3.8 MTPA steel plant in the State of Karnataka and is in the process of expanding its capacity to 6.8 MTPA by FY 2008-09. Recognizing the rapid industrial growth in the country, inherent competitive strengths India possess to set up additional steel capacities and the impending buoyancy in the steel demand, the Company proposes to expand organically by setting up incremental capacities in other parts of India. As a part of this strategy, the Company has executed a Development Agreement with The Government of West Bengal, West Bengal Industrial Development Corporation Ltd (WBIDC) West Bengal Mineral Development and Trading Corporation Ltd (WBMDTC) for setting up a 10 MTPA steel plant in suitable phases at an estimated cost of Rs 35,000 crores within 12 years from the date of execution of Development Agreement.

Synopsis of Development Agreement:

This agreement has certain unique features defining the deliverables from each of the parties in a time bound manner. While the Company is committed to implement and operate this project, the West Bengal Government committed / agreed to facilitate the provision of land, utilities, coal linkages and other raw material, statutory clearances in an expeditious manner. The Company is obliged to implement and operate this project through a special purpose joint venture Company over a period of 12 years from the effective date of the Development Agreement. This Development Agreement inter alia includes :

- Incorporating a special purpose joint venture Company with WBIDC, WBMDTC with an initial paid up and authorized capital of Rs 100 crores to be held 89% by JSW group (part of OP Jindal group) and balance by WBIDC and WBMDTC, to be increased at a later stage based on the financing structure.

- The shareholders Agreement will be executed within 6 months from the date of execution of Development Agreement.

- Subject to achieving financial closure and provision of raw material, land and utilities linkages, JV Company is obliged to complete the Phase I ( 3 MTPA) in 4 years and expand to 10 MTPA in suitable phases in 12 years from the date of execution of the Agreement at an estimated cost of Rs 35,000 crores.

- Government of West Bengal is committed to provide support, co-operation in acquiring land, coal linkages, water, infrastructure facilities, construction power, statutory clearances, transportation linkages etc. in a time bound manner.

- The joint venture Company's obligations also include providing rehabilitation and resettlement package through a series of corporate social responsibility initiatives.

This Development Agreement underscores the importance the West Bengal Government is giving for the accelerated industrial Development of the State in a focused manner.

Brief Profile of the Project:

Integrated steel plant along with captive power plant and other related facilities with a capacity of 10 MTPA at an estimated cost of Rs 35,000 crores is to be set up at Godapisal in West Midnapur district in the State of West Bengal. This project will be implemented in suitable phases, the first phase being 3 MTPA to be completed within 4 years from the date of execution of Development Agreement. A pre-feasibility report within 6 months followed by a detailed project report within 12 months will have to be prepared and finalized covering all the aspects of project including land, raw material, utilities, raw materials linkages, project schedules etc.

The total land requirement is estimated at 4800 acres consisting of 4300 acres of land vested with the Government and 500 acres of private land. The land vested with the government shall be given on long term lease to JV Company. The JV Company shall endeavor to acquire the private land directly.

The project will help in accelerating the pace of industrial development in the State of West Bengal by creating employment, infrastructure and in utilizing the mineral reserves viz. coal.

Financial Plans:

The Company has achieved the financial closure to expand capacity up to 6.8 MTPA at the existing location in the State of Karnataka and is marching ahead to commission the plant by FY 2008-09. Having achieved the debt gearing of 0.85 as on September 30, 2006, the company is cautiously formulating its capex programmes in a phased manner with avowed objective of not exceeding the debt gearing of 1. The Company plans to take up implementation of West Bengal project through a special purpose joint venture Company. While the first phase of the project of 3 MTPA including captive power plant is estimated to cost Rs 10,000 crores, the core cost of the steel plant assuming the power plant and oxygen plants will be implemented by other Associate companies with independent financing arrangement, is estimated to be Rs 6000 crores to be financed by equity of Rs 2000 crores and a debt of Rs 4000 crores. The debt is proposed to be raised in the joint venture company without recourse to the Company and the equity of Rs 2000 crores will be held to the extent of 51% by the Company and balance will be contributed by WBIDC / WBMDTC and group investment / associate Companies. The Company proposes to achieve the financial closure of the 1st phase of 3 MTPA special purpose joint venture Company with its own contribution pegged at around Rs 1000 crores. Further expansion to 10 MTPA will be appropriately structured with limited exposure to the Company. The Company expects to meet the requirement of Rs 1000 crores out of its cash accruals during implementation phase of 4 years.

The Company is poised to consolidate its position as one of the dominant players in the Indian steel industry with the signing of this Development Agreement with the Government of West Bengal considering the assurance of reliable coal utilities, transportation linkages for the project, prospects of expeditious development and implementation of the project and unstinted support from West Bengal Government.

Source : Equity Bulls

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