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Power divestment to help expand Steel capacities

JPL deal valued ~3.7x FY23E EV/EBITDA

We have mixed feelings about the proposed sale of Jindal Power (JPL) by JSP. While we find the enterprise value (EV) of ~INR95b, implying ~3.7x FY23E EV/EBITDA, for the asset a bit underwhelming, it does improve the growth outlook for the Steel business by freeing up both the Balance Sheet and management bandwidth. JSPL has already announced its intent to double capacity at Angul to 12mtpa. Moreover, by hiving off thermal Power plants and reducing its carbon footprint, access to global capital should improve for JSP. The deal should also aid in better value discovery for the Steel business, which is still under-valued at 4.5x FY22E EV/EBITDA. Reiterate BUY.

Details of the deal

JSPL has entered into a share purchase agreement (SPA) with WorldOne, a group entity, to transfer its entire equity holding (~96% stake) in JPL at an EV of ~INR95b and equity value of ~INR30b, of which the cash consideration is INR30b. The deal is valued ~3.7x FY23E EV/EBITDA and ~INR28m/MWH capacity, which is at a discount of ~17% to recently concluded deals. The deal would reduce JSP’s net debt by ~INR51b. The deal is likely to be completed over 12 months

* Details about JPL: The company has 3,400MW capacity, of which 870MW (26%) capacity is tied with long-term PPAs. In Dec’20, JPL was allocated 6mtpa Gare Palma IV/1 block at an agreed premium of ~25%. Currently, it is operating ~50% PLF. JPL has a net debt of INR65b at the end of Dec’20. We expect JPL to achieve an EBITDA of INR25.8b in FY23E, supported by rampup of production in Gare Palma IV/1.

* Inter-company transactions: JSP owes INR43.8b to JPL, which were taken as loans (~INR15b) and advances (~INR29b) for transfer of the Power plant from JPL to JSP. The same has been converted into an unsecured loan, which will be repaid in three installments from the fifth to the seventh year. In addition to this, JSPL holds 5% non-convertible redeemable preference shares of INR70.5b in JPL, issued in 3QFY21, of which INR40.5b is cumulative. The preference shares are redeemable after 15 years and within 20 years.

* Taking into account the net present value of preference shares and intercompany debt, the EV of the deal works out to ~INR95b. This works out to ~3.7x FY23E EV/EBITDA and INR28m/MWH capacity.

Valuation and view

* Valuation of INR28m/MWH and the EV of INR95b is at a discount to our SoTP value of INR117b. The divestment should enhance focus on its Steel operations and should help in better value discovery for the business.

* We estimate JSP’s net debt to reduce by INR130b over FY21E-23E to INR112b, driven by strong cash flows. We have not factored in JPL’s divestment in our estimates.

* At the CMP, the stock trades at an attractive 4.5x FY22E EV/EBITDA for the Steel business, which is a significant discount to peers (TATA and JSTL).

* We expect JSP to re-rate and value the stock at 5.5x FY22E EV/EBITDA (earlier 5x) to arrive at a TP of INR539/share.

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