JSW Steel on Tuesday announced that it would be making a preferential allotment for a 14.99 per cent stake to Japanese steel manufacturer JFE Steel Corporation.

Announcing the contours of the deal, JSW Steel Vice-Chairman and Managing Director Sajjan Jindal at a teleconference said the deal would result in a minimum accrual of Rs.4,800 crore and a ‘potential accrual' of Rs.5,700 crore to the company. The agreement would enable JFE to appoint a non-executive director on the JSW Steel board. JFE is the fifth largest steel producer in the world. “The deal ensures that JFE's holdings never cross 14.99 per cent,” Mr. Jindal clarified. The deal aimed “at deleveraging the company's balance sheet,” he said.

JSW Steel has now debts amounting to Rs.16,000 crore. “The deal will result in JSW's debt-equity ratio to fall from the current level of 1.7:1 to 0.5:1 by 2012,” Mr. Jindal said. The deal would enable the company to access technology, service demand for steel in the automotive industry and reduce costs of production, he added.

Apart from the share subscription agreement, JSW signed a technical assistance agreement, a collaboration agreement and a “substrate supply agreement,” that would enable JSW to source steel for the automotive sector from JFE till it establishes its own capacity. Pointing out that steel for automotive applications is “mostly imported,” Mr. Jindal said JFE would be the project consultant for its new cold rolling mill. He termed the deal “game changing in JSW's evolution.” “The agreements with JFE will short circuit our learning curve,” he added.

JSW steel, on a standalone basis, reported a net profit of Rs.350 crore in the first quarter, an increase of 3 per cent over the previous year. Net sales increased by 19 per cent to Rs.4,647 crore. Terming the environment in the quarter as ‘challenging', Mr. Jindal said domestic steel prices were lower because of declining prices in the international market. He said raw material prices, particularly coking coal, continued to remain high. The first shipments from the company's iron ore mine in Chile were likely to commence in October, he said.

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