Jindal Steel & Power rating – Buy: Deal improves growth outlook for steel business

We have mixed feelings about the proposed sale of Jindal Power (JPL) by JSP. While we find the enterprise value (EV) of ~`95 bn, implying ~5x FY22e 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 ~`95 bn and equity value of ~Rs 30 bn, of which the cash consideration is Rs 30 bn. The deal is valued at ~5x FY22e EV/Ebitda and ~Rs 28 m/MWH capacity, which is at a discount of ~17% to recently concluded deals. The deal would reduce JSP’s net debt by ~Rs 51 bn.

Valuation and view: Valuation of Rs 28m/MWH and the EV of Rs 95 bn is at a discount to our SoTP value of Rs 117 bn. We estimate JSP’s net debt to reduce by Rs 130 bn over FY21e-23e to Rs 112 bn, 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 Rs 539/share.