UPDATE 4-JFE invests $1 bln for India's JSW Steel stake

* To spend 48 bln rupees for 14.99 pct stake in voting rights

* First major capital alliance with foreign peer for JFE

* Deal gives JFE foothold in fast-growing Indian market

* JFE returns to profit in Apr-Jun, forecast misses consensus

(Adds details, analyst comments, JSW results)

By Yuko Inoue and Swati Pandey

TOKYO/MUMBAI July 27 (Reuters) - JFE Holdings Inc, the world's No.5 steelmaker, will spend about $1 billion for a 14.9 percent stake in India's JSW Steel Ltd, just shy of a mandatory public offer trigger level, in its bid to gain a foothold in the fast-growing Indian market.

The stake purchase, JFE's first major capital investment in a foreign steelmaker, will allow it to tap the rapidly growing market for auto-use steel in India. For JSW, India's No. 3 steelmaker, the deal will provide much-needed capital to expand.

Both JFE and its bigger rival Nippon Steel Corp are investing in Indian steel firms with an eye to the country's burgeoning automotive market. Nippon Steel plans to form an automotive sheet steel joint venture with leading Indian steelmaker Tata Steel Ltd by the end of the 2012 financial year.

Car sales in India are set to rise 12-13 percent in 2010/11 on the back of an expanding economy, prompting global carmakers to boost investment in the country.

'Domestic demand is weak and we have no choice but to shift our focus to expanding overseas,' JFE Vice President Shigeru Ogura told a news conference in Tokyo.

'We need to tap demand in broader Asia including the Middle East. Within that, India is an appropriate place to make an investment, and we view JSW as an attractive company with good growth strategy. '

JFE, which has been relying on exports and lagging Nippon Steel in setting up manufacturing bases in emerging economies, has no interest in taking a bigger stake in JSW, Ogura said.

'JSW made it clear that they want money, but don't want to be controlled by JFE.' he told reporters. He said JSW's high stock price was also a deterrent.

JFE Steel, the core unit of JFE Holdings, said that it would spend about 48 billion Indian rupees ($1.02 billion) on a preferential allotment of shares in JSW, with the aim of acquiring a 14.99 percent stake in terms of voting rights.

JFE also announced earnings on Tuesday, reporting a return to profit in the April-June quarter but giving only a cautious full-year outlook below market expectations citing weak Asian prices. Its shares fell 2.6 percent to 2,672 yen.



CHEAPER AND EASIER

JFE and JSW had agreed in November to consider taking stakes in each other as part of an alliance that would include making auto-grade steel in India and a move towards joint sourcing of raw materials.

The deal should make it cheaper and easier for JFE to supply India-based carmakers, such as Maruti Suzuki, the local unit of Suzuki Motor Corp.

Toyota Motor Corp and Honda Motor Co also plan to source goods such as sheet metal for their Indian plants from Indian suppliers, rather than importing them from Japan.

Analysts view this move as positive for JSW Steel, which has gross debt of nearly 162 billion rupees as on March 31 and has earmarked 70 billion rupees for capital spending as it looks to boost capacity.

JSW announced on Tuesday a standalone net profit of 3.5 billion rupees in the June quarter compared with 3.4 billion rupees a year ago and a consensus forecast of net profit of 4.96 billion rupees.

It expects its debt-to-equity ratio to fall by its 2012 financial year following JFE's investment.

'This is quite positive for the company as JSW has huge capex plans. So this money can be used to fund capex and bring down the debt,' said Pawan Burde, a senior analyst at Centrum Broking in Mumbai.

JFE said that it would provide JSW with technology to make automotive steel as well as consider involvement in an integrated mill project in the state of West Bengal that had been put on hold due to funding problems.

Ogura said JFE would be paid for its technology and for its supply of substrates and it would use JSW's marketing network to sell specialised steel to the Indian firm's customers.

JFE is also counting on a dividend from its stake and hopes to profit from an expected appreciation in the rupee, Ogura said.

'Given the view of demand growth in India for the next ten to twenty years, the stake in JSW should help JFE expand earnings over a long term, however, only if JFE manages to build and maintain a successful partnership with JSW,' said Shinya Yamada, an analyst with Credit Suisse in Tokyo.

JSW's shares were down 0.7 percent at 1,162 rupees after the announcement. The stock had risen nearly 6 percent since June, outperforming its peers on expectations of the investment by JFE and strong quarterly earnings.

($1=47.05 Indian Rupee)

(Editing by Joseph Radford and Valerie Lee)

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