JSPL-Oman steel asset sale completion key for benefits of debt reduction

Deal valuation is good, but analysts watchful

Jindal Steel & Power (JSPL) accepting a binding offer from Templar Investments for sale of its entire stake in its Oman-based steel business is a positive for the Indian steel major.

The 2.4-million tonne per annum (mtpa) capacity is being divested for an enterprise value of more than $1 billion, and will help JSPL reduce debt by 20 per cent, besides allowing the company to focus on its more profitable Indian operations.

JSPL’s net debt stood at Rs 35,919 crore ($4.8 billion) as of March 31, of which Rs 5,619 crore ($740 million) is attributed to Shadeed Iron & Steel — the Oman business.

The Oman steel plants operated at 80 per cent utilisation (1.87 mt) in 2019-20 (FY20) and generated an earnings before interest, tax, depreciation, and amortisation (Ebitda) of $138 million, or $73 per tonne. Analysts had estimated an Ebitda of $170-177 million for the Oman business in 2021-22 (FY22), leading to an enterprise value/Ebitda valuation of 5.8x.

Analysts at Edelweiss Securities say the deal implies a valuation of 7.5x, which is a premium to 5.1x multiple they had ascribed to the business in their sum of the parts valuation (SOTP).

Yet, the stock was down 4.9 per cent on Wednesday.

 

 

One reason could be that the stock had been gaining in anticipation of this deal — it was up over 60 per cent since May 20, against 7-14 per cent rise in other major steel stocks (Tata Steel, JSW Steel, and Steel Authority of India) and the Sensex.

Secondly, the completion of this deal is crucial. The Street remains watchful since Templar Investments is a part of the promoter’s group said to be holding 0.73 per cent stake in JSPL. Analysts at Kotak Institutional Equities say JSPL has failed to conclude divestment transactions in the past with related parties, but appears confident of completing this transaction within a month. If the deal concludes, it would add Rs 27 per share, or 14 per cent to its SOTP of Rs 200. More importantly, it would address debt repayment concerns and could rerate the stock further, said analysts.

For now, most brokerages remain positive on the stock despite tepid steel demand. The expanded capacities leading to rising scale of operations, lower coal prices, and availability of iron-ore inventory of Sarda mines bode well.

Analysts at Motilal Oswal Financial Services say while they have assumed debt reduction of Rs 7,200 crore during FY20-FY22, the completion of this deal could help reduce debt by a further Rs 7,500 crore.

All this clearly shows how important the deal’s completion is for JSPL’s investors.