UPDATE 5-JFE invests $1 bln for India's JSW Steel stake

* First major investment in foreign peer

* Deal gives JFE foothold in fast-growing Indian market

* JFE returns to profit in Q1, outlook below forecasts

* JSW posts profit in Apr-June, lags forecast (Adds details, analyst comments, JSW results)

By Yuko Inoue and Swati Pandey

TOKYO/MUMBAI July 27 (Reuters) - JFE Holdings Inc (5411.T), the world's No.5 steelmaker, will spend about $1 billion for a 14.9 percent stake in India's JSW Steel Ltd, in an attempt to gain a foothold in the fast-growing Indian market.

The stake, just shy of the level that would trigger a mandatory public offer, is the Japanese steelmaker's first major capital investment in a foreign peer.

JFE's investment will allow the two firms to tap the rapidly growing market for auto-use steel in India. For cash-strapped JSW (JSTL.BO), India's No. 3 steelmaker, the deal will provide much-needed capital to expand.

Both JFE and its bigger rival Nippon Steel Corp (5401.T) 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 (TISC.BO) by the end of the 2012 financial year.

Car sales in India are set to rise 12-13 percent in 2010/11 as the economy expands, 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 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. [ID:nT267373]

However, JSW is not keen on buying a stake in the Japanese firm now but is open to discussions with JFE for more investments, Managing Director Sajjan Jindal told a news conference.

JSW Steel is aggressively expanding capacity to 10 million tonnes by March 2011. It plans to set up another 10 million tonnes plant in the eastern state of West Bengal that was put on hold due to funding problems.

CHEAPER AND EASIER

Access to better technology from JFE will help cut cost of production, making it cheaper and easier for both the companies to supply India-based carmakers, such as Maruti Suzuki (MRTI.BO), the local unit of Suzuki Motor Corp (7269.T).

Toyota Motor Corp (7203.T) and Honda Motor Co (7267.T) also plan to source goods such as sheet metal for their Indian plants from Indian suppliers, rather than importing them from Japan.

"As our country grows and expands, we will need more and more high-end, value-added automotive steel, which we are currently importing," Jindal said.

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 rise in the rupee.

It 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. [ID:nTOE66806Q]

"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 at Credit Suisse in Tokyo.

POSITIVE FOR JSW

JSW Steel has gross debt of 177 billion rupees as on June 30 and has earmarked 70 billion rupees for capital spending as it looks to boost capacity. It expects its debt-to-equity ratio to fall by FY12 following JFE's investment. [ID:nBMB011088]

JSW announced on Tuesday 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.

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 rupees) (Editing by Valerie Lee and Erica Billingham)