Jindal Steel dips 3.5% after JSPML agrees to sell full stake in Oman plant

Shares of Jindal Steel and Power Ltd (JSPL) declined up to 3.5 per cent to Rs 155.35 on the BSE on Wednesday after the company said it's subsidiary Jindal Steel & Power (Mauritius), or JSPML has accepted a binding offer from Templar Investments to divest its entire stake in its Oman asset, Jindal Shadeed Iron and Steel (JSIS Oman).

The enterprise value of the deal is over $1 billion and Alpen Capital, a West Asia-based investment bank was appointed to run the sale process, which received competitive offers from multiple interested bidders.

"The divestment is in line with JSPL’s vision and commitment to continuously bring down its debt and deleverage its balance sheet," the company said in a release.  READ HERE

"JSPL’s Oman asset has capacity of 2.4mtpa and had outstanding debt of Rs 5600 crore at end-FY20. It operated at ~80% utilization in FY20 and generated an EBITDA of USD138m. We estimate EBITDA of USD170m for FY22E, implying deal value of 5.8x FY22E EV/ EBITDA... JSPL had USD4.8b debt in FY20 and the deal should reduce its debt by around 20 per cent and net debt/ EBITDA to 3.5x. Additionally, the deal would enable faster deleveraging, which adds more comfort on the balance sheet and improves focus on domestic steel operations," said analysts at Motilal Oswal Financial Services in its stock update report.

The brokergae has a 'buy' call on the stock and believes that JSPL should reduce its net debt by Rs 7,200 crore (INR71/share) over FY20-22E to Rs 30,700 crore at end-FY20 through FCF generation led by higher EBITDA. "If this deal materializes, it would lead to an additional debt reduction of ~Rs 7,500 crore. We value JSPL on SOTP basis (valuing the steel business at 4.5x FY22E EV/EBITDA) and the power business using DCF methodology. In our atrget price, the Oman business contributes an EV of Rs 5,900 crore (INR58/share). As a result, our TP will rise by INR16/share if the deal is finalized at $ 1 billion," it said.

As on 31 March 2020, the Oman plant had gross debt of Rs 5,619 crore, according to the company’s presentation.  For the March quarter of FY20, JSPL posted a consolidated profit of Rs 306 crore and cut its net debt by Rs 4,379 crore in FY20 on a constant currency basis. It had posted a net loss of Rs 2,713 crore in the corresponding quarter last year.

"JSP is burdened with Rs61 bn of debt repayment obligations in FY2021E with ~Rs40 bn at international entity and Rs21 bn at India entity. With cash-generation only at India entity, cash fungibility is also a challenge. If the Oman divestment concludes, it would reduce JSP’s international debt by 46% to Rs78 bn and address all its repayment obligations. The transaction after repayment of US$200 mn inter-company advances would fetch US$880 mn (Rs66 bn) or 6.6X EV/EBITDA based on FY2020 EBITDA. We estimate lower EBITDA at Oman in FY2022E due to weak demand and value the business at 5.5X EV/EBITDA or Rs38 bn (Rs37/share) in our SOTP. The deal would add Rs28 bn or Rs27/share (+14%) to our fair value," said analysts at Kotak Securities.

The brokerage has 'buy' call on the stock with a fair value target of Rs 200.

At 10:25 am, the stock was trading 3.5 per cent lower at Rs 155.9 apiece on the BSE as against 144 points, or 0.41 per cent, rise in the benchmark S&P BSE Sensex. On Tueday, the stock had rallied 7.7 per cent in the intra-day trade.