How Will ArcelorMittal’s JV With SAIL Be Beneficial For The Company In The Long Run

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The Union Steel Minister of India has announced that the world’s largest steel producer, ArcelorMittal, and the Indian state run steel producer, Steel Authority of India (SAIL), would be entering into a joint venture (JV) to establish an INR 5000 crore (approximately $765 million) steel plant in India to produce auto-grade steel as of  early 2018. [1] The expected plant, when established, will have an output capacity of 1.5 million tons of steel. The increase in presence of ArcelorMittal in the Indian economy would remain a positive for the company given the thriving Indian automobile industry.

The automobile industry in India contributes roughly 7% to the country’s GDP [2] and remains a high potential growth area for the economy as a whole. The Indian economy is expected to grow at a rate of 6.7% in 2017, followed by growth rates of 7.4% and 7.8% in 2018 and 2019, respectively. [3] The government has been providing various incentives to multinationals in order to facilitate the ease of production of automobiles in the country to foster the growth of the industry. Initiatives such as 100% FDI approval, Automative Mission Plan (AMP 2026, which aims to increase fourfold the growth of the automobile industry), and Make in India initiative, has helped improve the environment for setting up production facilities in the country. Additionally, availability skilled manpower with technological expertise at low prices remains as a cost advantage to global manufacturers.

The demand environment in the country has also remained favorable as the growth of the economy has translated into a higher disposable income for the people and hence resulted in increase domestic demand for automobiles. Domestic sales volume increased by approximately 7% on Y-O-Y basis.

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You can view our base case for ArcelorMittal here and create different scenarios using our interactive platform.

(Source: Society of Indian Automobile Manufacturers, data as on financial year ending April-March)

The demand environment for auto grade steel remains favorable in the Indian economy and it makes sense for ArcelorMittal to increase it’s presence in India. The terms of the 50:50 JV are yet be finalized and is expected to gain ground over the next 2-3 months. However, the company’s interest in purchasing debt-ridden Indian giants, Bhushan steel and Essar steel might hamper its agreement with SAIL as it would lead to a violation of a non-compete clause. We shall keep a close watch as these developments take shape. [4]

We have a price estimate of $26 for ArcelorMittal which is 9% below the market.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for ArcelorMittal

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Notes:
  1. SAIL and ArcelorMittal to sign pact for auto-grade steel plant, Moneycontrol []
  2. Automobile Industry in India, IBEF []
  3. Real GDP growth, IMF []
  4. ArcelorMittal’s focus on other assets may hit $1 billion Indian JV, Reuters []