Jindal Steel and power (JSPL’s) Mauritius subsidiary accepting a binding offer from Templar Investments Limited to divest its entire stake in Oman steel remains a positive development. The 2.4 million tonne per annum (MTPA) capacities being divested for enterprise value of more than $1 billion is likely to help company reduce debt by about 20 per cent while the company can focus on more profitable Indian operations.
JSPL total debt stood at $4.8 billion in FY20 out of which about $800 million was attributed to Oman. The Oman steel operated at 80 per cent utilisation (1.87 MT production) in FY20 and generated an EBITDA of $138million ($73/tonne) in FY20 and analysts had estimated the operation reporting $170-$177 million Ebitda in FY22. The deal valuation thereby comes to about 5.8x FY22E EV/ EBITDA.
Analysts at Edelweiss had valued the company at 5.1x FY22E EBITDA in their Sum of the parts valuations and say that the above mentioned transaction implies a valuation of 7.5x FY22E EBITDA, which is a premium to the multiple we ascribed.
Further the deal is expected to reduce the debt by about 20 per cent which should be looked at in positive light.
The stock that had been gaining in anticipation of deal however corrected about 4.89 per cent on Wednesday. However the key is completion of deal and street remains watchful since Templar Investment is a part of promoter’s group said to be holding 0.73 per cent stake in JSPL. Analysts at Kotak Institutional Equities say that 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 Rs27/share or 14 per cent to their SOTP of Rs200 and importantly, would address debt repayment concerns and could re-rate the stock further say analysts.
Most analysts however have already maintained positive outlook on the stock despite tepid steel demand. The expanded capacities leading to benefits from rising scale of operations, lower coal prices and available Sarda iron-ore inventories bode well. Analysts at Motilal Oswal financial Services say that though company has guided for 15 per cent volume growth they are factoring six per cent volume growth and they also expect lower input costs to offset the lower realisations on exports. While they were building Rs 7200 crore debt reduction during Fy20-22, completion of deal can help reduce debt by further Rs 7500 crore.