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Bid process for divestment of JPL a positive

WorldOne’s revised offer to act as the base offer in the bidding process

* JSPL has revised the terms of sale of its Power subsidiary – JPL – to promoter entity WorldOne. While WorldOne’s valuation offer remains unchanged at an EV of ~INR95b (implying 5.3x FY21 EV/EBITDA), it has agreed to simplify the deal structure by netting off the value of preference shares (payable after 20 years) issued by JPL to JSPL against the inter-corporate debt issued by JPL to JSPL. In effect, JSPL, post the JPL divestment, will now have a leaner Balance Sheet, with an effective net debt reduction of INR93b v/s ~INR50b in the older deal structure.

* Moreover, there will now be a transparent competitive bidding process to invite third parties to bid at a price higher than the INR95b EV offered by WorldOne. This could lead to a better value discovery for JPL. Our NPV model for JPL suggests an EV of INR110b for the asset (based on additional ~INR6b EBITDA contribution from Gare Palma coal block). JSPL (excluding JPL) is trading at 4x FY23E EV/EBITDA, which we find attractive, given its lean Balance Sheet and resumption of growth capex in Steel. We therefore rate it a Buy with a TP of INR475/share.

Details of the deal

WorldOne would pay a cash consideration of INR30.15b and take over the intercompany loans/deposits of INR43.8b to be paid by JSPL to JPL. It would, however, get rights for the INR70.5b preference shares issued by JPL to JSPL, which are redeemable in 20 years (implying an NPV of ~INR42b), thereby implying an effective net equity value of ~INR32b. JPL’s net debt stood at ~INR63b as of Mar’21, implying a total EV offer of INR95b by WorldOne. This compares with an adjusted EBITDA of ~INR18b in FY21, implying 5.3x FY21 EV/EBITDA and INR28m/MWH for the asset.

* Details about JPL: The company has 3,400MW capacity, of which 870MW (26%) capacity is tied to long-term PPAs. In Dec’20, JPL was allocated the 6mtpa Gare Palma IV/1 block at an agreed premium of ~25%. It operated at a PLF of ~44% in FY21. Net debt stood ~INR63b at the end of Mar’21. We expect JPL to achieve an EBITDA of INR22.8b (14% CAGR over FY21-23E) in FY23E, supported by a ramp-up of production in Gare Palma IV-1.

* Details of previous deals: The earlier deal valued JPL at an EV of INR95b and offered JSPL a cash consideration of INR30b. However, the inter-company loans/advances of INR43.8b/INR70.5b owed by JSPL/NCRPS held by JSPL in JPL were continued. The inter-company loans were payable by JSPL in three installments from year five to seven, whereas the same for NCRPS was redeemable after 15 years, but within a maximum period of 20 years. Taking into account the net present value of preference shares and inter-company debt, the EV of the deal worked out to ~INR95b.

Valuation and view

* We estimate JSPL’s net debt to reduce by INR88.2b over FY21-23E to INR133b, driven by strong cash flows. We have not factored in proceeds from JPL’s divestment in our estimates.

* At the CMP, the stock trades at an attractive 4.1x FY23E EV/EBITDA for the Steel business, which is a significant discount to peers (Tata Steel and JSW Steel). We expect JSPL to re-rate and value the stock at 5x FY23E EV/EBITDA to arrive at our TP of INR475/share.

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