JSW Steel acquired Bhushan Power and Steel for Rs 19,700 crores. This acquisition will increase JSW Steel's capacity from 18 MT to 21.5 MT. JSW Steel bid this amount and was given approval by the National Company Law Appellate Tribunal. The acquisition of Bhushan Power and Steel, one of India's largest bankrupt companies, is expected to make JSW Steel the largest steel producer in India. Financial analysis of the acquisition through NPV and IRR calculations validated that the acquisition is worth making for JSW Steel.

1. JSW STEEL ACQUISITION OF BHUSHAN
POWER AND STEEL

2. INTRODUCTION
AS ON FEBRUARY 21, 2020
 JSW STEEL’S CAPACITY IS SAID TO INCREASE FROM 18 MT TO 21.5 MT BY
ACQUIRING BHUSHAN POWER AND STEEL.
 JSW IS SAID TO ACQUIRE BHUSHAN POWER AND STEEL WITH WORTH OF RS
19,700 CRORES.
 JSW HAS GOT GREEN SIGNAL FROM THE NATIONAL COMPANY LAW APPELLATE
TRIBUNAL (NCLAT).
 BHUSHAN POWER AND STEEL WAS ONE OF THE 12 LARGEST CORPORATE
ACCOUNTS IDENTIFIED BY THE RBI IN JUNE 2017 FOR RESOLUTION UNDER THE
INSOLVENCY AND BANKRUPTCY CODE.
 JSW STEEL BIDS Rs 19,700 crore BY PROVIDING IT IMMUNITY AGAINST FUTURE
LITIGATIONS.

3. JSW ACQUISITION OF TATA BSL LTD.
TO KNOW IF THE ACQUISITION IS WORTH MAKING BY THE JSW
COMPANY, WE MADE AN EFFORT TO CALCULATE THE NPV (NET
PRESENT VALUE).
 IN THE FOLLOWING SLIDES THE CALCULATIONS TO VALIDATE THE
ACQUISITION MADE BY JSW ARE SHOWN.

4. JSW ACQUISITION OF TATA BSL ltd.
INITIAL INVESTMENT MADE BY JSW IN
BHUSHAN POWER AND STEEL
INITIAL INVESTMENT*T-BILL RATE FOR 10
YEARS(6.18%)
ASSUMPTION MADE
Rs1,441 IS THE
DEPRECIATION IN THE
YEAR 2019
2 IMPLIES THAT THE DEPRECIATION METHOD
USED WOULD BE WRITTEN DOWN.
IT IS A TAX RELATED INCENTIVE THAT
ALLOWS ENTITIES TO DEDUCT A CERTAIN
PERCENTAGE OF SPECIFIC INVESTMENT
RELATED COSTS FROM THEIR TAX LIABILITY.

5. JSW ACQUISITION OF TATA BSL ltd.
Rs 20,891 IS THE REVENUE OF 2019
CORPORATE TAX RATE FOR LISTED
COMPANIES IS 25%
SINCE, WE DO NOT HAVE THE BREAKDOWN OF FIXED AND VARIABLE EXPENSES, WE HAVE
TAKEN THE ENTIRE EXPENSE AS A PERCENTAGE OF REVENUES.

6.  MARKOWITZ, WILLIAM SHARPE, JOHN LINTNER AND JAN MOSSIN PROVIDED
THE BASIC STRUCTURE FOR THE CAPM MODEL.
 CAPM MODEL IS A MODEL OF LINEAR GENERAL EQUILIBRIUM RETURN.
 IN THE CAPM MODEL, THE REQUIRED RATE OF RETURN OF AN ASSET IS
HAVING A LINEAR RELATIONSHIP WITH ASSET’S BETA VALUE ie;(undiversifiable
or systematic risk).
 THE CAPM FORMULA IS USED FOR CALCULATING THE EXPECTED RETURNS
OF AN ASSET. IT IS BASED ON THE IDEA OF SYSTEMATIC RISK(OTHERWISE
ALSO KNOWN AS THE NON- DIVERSIFIABLE RISK) THAT THE INVESTORS
NEED TO BE COMPENSATED FOR IN THE FORM OF RISK PREMIUM.
CAPM MODEL

7.  A RISK PREMIUM IS A RATE OF RETURN GREATER THAN THE RISK-FREE RATE.
WHILE INVESTING, INVESTORS DESIRE A HIGHER RISK PREMIUM WHEN THEY
TAKE RISKY INVESTMENTS.
CAPMFORMULA
Ra= Rf+{β*(Rm-Rf)}
WHERE,
Ra = Expected return on a Security,
Rf = Risk- free rate of Rate,
Β = Beta of a Security,
Rm = Expected return of the market
Note: Risk Premium = Rm - Rf
CAPM MODEL

8.  EXPECTED RETURN:
THE “Ra” NOTATION IN THE FORMULA MEANS THE EXPECTED RETURN OF A CAPITAL
ASSET OVER TIME, GIVEN ALL OF THE OTHER VARIABLES IN THE EQUATION. “EXPECTED
RETURN” IS A LONG- TERM ASSUMPTION ABOUT HOW AN INVESTMENT WILL PLAY OUT
OVER ITS ENTIRE LIFE.
 RISK FREE RATE:
The “Rf” NOTATION IN THE FORMULA IS FOR THE RISK FREE RATE, WHICH IS TYPICALLY
EQUAL TO THE YIELD ON A 10 YEAR GOVERNMENT BOND. THE RISK FREE RATE SHOULD
CORRESPOND TO THE COUNTRY WHERE THE INVESTMENT IS BEING MADE, AND THE
MATURITY OF THE BOND SHOULD MATCH THE TIME HORIZON OF THE INVESTMENT.
PROFESSIONAL CONVENTION, HOWEVER, IS TO TYPICALLY USE THE 10 YEAR RATE,
BECAUSDE IT IS THE MOST HEAVILY QUOTED AND THE MOST LIQUID BOND.
HERE IN THIS CALCULATION WE HAVE TAKEN TREASURY BILL AS THE GOVERNMENT
BOND AND THE RATE FOR 10 YEARS IS 6.18%
CAPM MODEL

9. BETA:
THE “β” NOTATION IN THE FORMULA IS A MEASURE OF STOCK’S
RISK(VOLATILITY OF RETURNS) REFLECTED BY MEASURING THE
FLUCTUATIONS OF ITS PRICE CHANGES REALTIVE TO THE OVERALL MARKET.
IN OTHER WORDS, IT IS THE STOCKS SENSITIVE TO THE MARKET RISK.
HERE IN THIS CALCULATION WE HAVE CALCULATED BETA TAKING THE CLOSING
PRICES OF NIFTY AND TATA BSL FOR A PERIOD OF 28TH FEB 2019 TO 28TH FEB
2020.
WE HAVE CALCULATED THE RETURNS USING THE FORMULA (P0-P1/P1).
WE HAVE CALCULATED THE BETA USING THE SLOPE EXCEL FUNCTION BY
TAKING THE RETURNS OF THE COMPANY AND THE NIFTY RETURNS.
CAPM MODEL

10.  RISK PREMIUM:
FROM THE ABOVE COMPONENTS OF CAPM FORMULA, WE CAN SIMPLIFY THE
FORMULA TO REDUCE “EXPECTED RETURN OF THE MARKET(Rm) MINUS THE
RISK-FREE RATE(Rf)” TO BE SIMPLY THE “MARKET RISK PREMIUM(Rp)”.
THE MARKET RISK PREMIUM REPRESENTS THE ADDITIONAL RETURN OVER
AND ABOVE THE RISK-FREE RATE, WHICH IS REQUIRED TO COMPENSATE
INVESTORS FOR INVESTING IN A RISKIER ASSET CLASS.
THEREFORE, IN OUR CALCULATION WE HAVE TAKEN THE Rm AND Rf AS
CALCULATED EARLIER AND GOT THE Rp(RISK PREMIUM) AS FOLLOWS:
Rp= Rm-Rf
CAPM MODEL

11. USING THE ABOVE EXPLAINED CAPM METHOD WE HAVE CALCULATED THE DISCOUNT
RATE AS 6.34%
IN CASE WE DON’T USE THE CAPM METHOD
WE ARE ASSUMING THE DISCOUNT RATE TO
BE AT10%. BUT HERE WE HAVE USED THE
CAPM METHOD.
HERE WE JSW IS USING ITS OWN MONEY TO
MAKE THE ACQUISITION AND THEREFORE,
THERE WOULD NOT BE ANY DEBT OR
BORROWING FOR THE COMPANY AND
HENCE IT IS 0%
CAPM MODEL

12. Working capital calculations
THE INITIAL WORKING CAPITAL IS CALCULATED TAKING THE CURRENT ASSETS AND CURRENT LIABILITIES BY
USING THE FOLLOWING FORMULA:
WORKING CAPITAL= CURRENT ASSETS – CURRENT LIABILITIES
AND THEN A PECENTAGE OF WORKING CAPITAL ON REVENUE WAS DONE AND 1.93% WAS OBTAINED.

13. Growth rates calculations
WE HAVE TAKEN THE GROWTH RATE OF JSW COMPANY TAKING THE SALES INTO
CONSIDERATION AND WE ASSUME THAT THERE WILL BE THE SAME OR EQUIVALENT
AMOUNT OF GROWTH IN THE NEXT COMING YEARS AND THEREFORE, WE HAVE
CALCULATED THE AVERAGE OF THE GROWTH RATES.
AVERAGE OBTAINED IS 19.38%

14. THEREFORE, TAKING ALL THE ABOVE INFORMATION THAT WE OBTAINED
THE INITIAL INVESTMENT MADE BY JSW COMPANY IS AS FOLLOWS:
Initial investment

15.  THE PRESENT VALUE OR THE DISCOUNTED CASH FLOW PROCEDURE
RECOGNISES THAT CASH FLOW STREAMS AT DIFFERENT TIME PERIODS
DIFFER IN VALUE AND CAN BE COMPARED ONLY WHEN THEY ARE
EXPRESSED IN TERMS OF A COMMON DENOMINATOR, ie: PRESENT VALUES.
 IT TAKES THE TIME VALUE OF MONEY INTO ACCOUNT, WHERE ALL THE CASH
FLOWS ARE EXPRESSED IN TERMS OF THEIR PRESENT VALUES BY
DICOUNTING THE CASHFLOWS.
 NPV IS FOUND BY SUBTRACTING A PROJECT’S INITIAL INVESTMENT FROM
THE PRESENT VALUESOF ITS CASH INFLOWS DISCOUNTED AT THE FIRM’S
COST OF CAPITAL.
NET PRESENTVALUE(NPV)
NPV DECISION RULE
IN NPV METHOD,
IF THE NPV OBTAINED IS POSITIVE IT SIGNIFIES THAT THE PROJECT SHOULD BE ACCEPTED
IF THE NPV OBTAINED IS NEGATIVE IT SIGNIFIES THAT THE PROJECT SHOULD BE REJECTED.

16. FORMULA USED FOR CALCULATING NPV IS AS FOLLOWS:
NET PRESENTVALUE(NPV)
𝑁𝑃𝑉 =
𝑡=1
𝑛
𝐶𝐹𝑡
1 + 𝐾 𝑡
−
𝑡=0
𝑛
𝐶𝑂 𝑡
1 + 𝐾 𝑡
Where,
• CF t = cash inflows in time period t
• K = is the discount rate obtained by using CAPM model
• C0 t = is the cash outflow or the initial investment made by the company at
time t.
• T = time period

17.  HERE WE HAVE TAKEN REVENUE OF 2019 AND THEN WE EXPECT THE GROWTH
TO BE 19.38% AS CALCULATED EARLIER AND WE GOT THE CASHFLOWS.
DISCOUNTING THE CASH INFLOWS WE HAVE GOT THE DISCOUNTED CASHFLOW
i.e.; (CASHFLOW AFTER TAX AND INTEREST BUT BEFORE DEPRECIATION).
NET PRESENT VALUE (NPV)
USING THE NPV FORMULA WE HAVE CALCULATED NPV

18.  THE INTERNAL RATE OF RETURN IS USUALLY THE RETURN THAT A PROJECT
EARNS.
 IT IS DEFINED AS THE DISCOUNT RATE AT WHICH EQUATES THE AGGREGATE
PRESENT VALUE OF THE NET CASH INFLOWS WITH THE AGGREGATE
PRESENT VALUES OF CASH OUTFLOWS OF A PROJECT.
 IN OTHER WORDS, IT IS THE RATE AT WHICH GIVES THE PROJECT NPV AS
ZERO.
INTERNALRATE OF RETURN(IRR)
IRR DECISION RULE
IN IRR METHOD,
WE COMPARE THE ACTUAL IRR WITH THE REQUIRED RATE OF RETURN/CUT-OFF/HURDLE RATE.
 IF THE IRR OBTAINED IS MORE THAN THE CUT-OFF RATE, THEN THE PROJECT CAN BE ACCEPTED.
 IF THE IRR OBTAINED IS EQUAL TO THE CUT-OFF RATE, THEN IT DEPENDS ON THE DECISION
MADE BY THE FIRM TO ACCEPT OR REJECT.
 IF THE IRR OBTAINED IS LESS THAN THE CUT-OFF RATE, THEN THE PROJECT SHOULD BE
REJECTED.

19.  FORMULA USED TO CALCULATE IRR IS AS FOLLOWS:
INTERNAL RATE OF RETURN (IRR)
𝑰𝑹𝑹 =
𝒕=𝟏
𝒏
𝑪𝑭𝒕
𝟏 + 𝑹 𝒕
+
𝑺𝒏 + 𝑾𝒏
𝟏 + 𝑹 𝒏
−
𝒕=𝟎
𝒏
𝑪𝑶 𝒕
𝟏 + 𝑹 𝒕
= 𝒁𝑬𝑹𝑶
THE IRR OBTAINED IS 13.78% TAKING THE DISCOUNT RATE CALCULATED USING THE CAPM
MODEL AND THE CASHFLOW AFTER INTEREST AND TAX BUT BEFORE DEPRECIATION,
BEFORE IT IS BEING DISCOUNTED.
WHERE,
R = Internal rate of return
CF t = cash inflows at different time periods
Sn = Salvage value
Wn = Working capital adjustments
CO t = Cash outlay at different time periods

20. CONCLUSION
FROM THE CALCULATIONS DONE WE CAN CONCLUDE THAT,
 SINCE WE GOT A POSITIVE NPV OF Rs14,110.77crores, THE ACQUISITION MADE
BY JSW IS WORTH.
BY TAKING 10 YEARS AS THE LIFETIME OF THE ACQUISITION WE HAVE
A POSITIVE FIGURE SO IF THE LIFE TIME IS MORE THAN 10 YEARS AS ASSUMED
JSW WILL DEFINITELY HAVE HUGE AMOUNTS OF PROFIT AND THIS VALIDATES
THE POINT THAT JSW WILL BECOME THE BIGGEST STEEL COMPANY IN INDIA.
SINCE WE GOT A IRR HIGHER THAN THE CUT OFF RATE i.e;
IRR OBTAINED IS 13.78%
CUT OFF RATE IS 6.34%
WE CAN SAY THAT THE INVESTMENT MADE BY JSW COMPANY IS WORTH THE
ACQUISITION.