Analysts See More Upside For JSPL Stock, Better Steel Valuation On Power Unit Sale

Analysts expect Jindal Steel & Power Ltd.'s sale of coal-fired power division to fetch better valuation multiples for its core steel business and a Rs 18-20 apiece upside for the stock even as some remain divided over the deal's enterprise value.

That apart, a successful divestment would lower the company's consolidated debt, improve cash flows and its focus on core steel division, the brokerages said in their reports.

JSPL has accepted a binding offer from Worldone Pvt., a promoter group entity, to divest its 96.42% stake in subsidiary Jindal Power Ltd., it had said in an exchange filing on Tuesday. The equity value is an all-cash offer of Rs 3,015 crore for the stake sold, including 3,400-megawatt coal-fired power plants in Chhattisgarh and other non-core assets owned by Jindal Power.

Edelweiss Securities, however, said the deal was at a lower valuation than its estimate.

“Jindal Power's divestment has left us unimpressed — cash consideration of Rs 3,000 crore undershot our estimate, net debt reduction is limited by the conversion of inter-corporate debt of Rs 4,350 crore, the value of Rs 7,000 crore (5% coupon) of redeemable preference shares is likely to be realised over a long term. Even without adjusting for the time value of money, the total EV of Rs 12,000 crore falls short of our estimate of Rs 16,000 crore,” the brokerage said in its report. “Under the best-case scenario too, at Rs 3.56 crore/MW, the valuation falls short of our estimate of Rs 4.7 crore/MW.”

According to Investec, EV adjusted for redeemable preference shares and inter-company loans, stands at Rs 9,000 crore on an NPV basis (versus headline EV of Rs 12,000 crore). “A cleaner structure — one without redeemable preference share and inter-co loans — would be a more desirable outcome.”

Separately, Morgan Stanley said the return ratio profile of the consolidated entity will improve given Jindal Power was a drag on consolidated numbers. The subsidiary's estimated return on equity for FY21 is -3% versus about 25% for standalone (for JSPL steel business), the research firm said.

Here's what brokerages have to say about JSPL's move to divest power division...

Morgan Stanley

• Maintains ‘overweight' rating with the target price at Rs 410 apiece.
• With this potential divestment, the narrative of deleveraging has played out well.
• JSPL's steel business could see some rerating.
• Net debt unlikely to exceed Rs 11,000-12,000 crore and net debt to Ebitda of 1.2-1.3 times over the next two years.
• Return ratio profile of consolidated entity will improve given JPL was a drag on consolidated numbers.
• On ESG metrics, JSPL will look better as its carbon footprint will reduce by almost half.
• With the focussed approach of the group on the India steel business, a de-risked balance sheet and a significantly better return ratio profile, JSPL could command higher multiples than it has been trading at in the recent past.
• “In the near term, we believe that with rising steel prices (more price hikes to come) and this potential divestment of the power business, the trading range for the stock could be between current price and our bull case value of Rs 540/share.”

Macquarie

• Retains ‘outperform rating' but cuts target price to Rs 436 from Rs 448 apiece.
• Expects enterprise deal value at Rs 8,800 crore by factoring the current value of redeemable non-cumulative preference shares (including coupon) with payment in 20th year (from issuance date) and discounting rate at 11%. “This compares with our assigned value of Rs 6,900 crore to the power business, implying potential upside of Rs 18 per share.”
• Expects JSPL's net debt to decline 20% (Rs 5,100 crore) on the back of the deal to Rs 20,000 crore (relative to Dec-20 level).
• JSPL remains on track to reduce its debt over the next few quarters.
• With strong steel prices, high-capacity utilisation and deleveraging, JSPL is well placed from cash flows and growth standpoint.

Investec Securities

• Maintains ‘buy' with a target price of Rs 522 apiece.
• A divestment would do away with capex liabilities related to environmental compliance.
• A successful closure could add more than Rs 20 apiece to target price.

Edelweiss Securities

• Downgrades JSPL to ‘hold' from ‘buy'; cuts target price to Rs 470 from Rs 500 apiece.
• Divestment of Jindal Power at a lower valuation than estimate of Rs 1,600 crore.
• Reduction in debt of up to Rs 5,200 crore—in line with the company's strategy of paring net debt to Rs 15,000 crore.
• “Realised consideration of Rs 3,000 crore falls short of our fair value of Rs 9,500 crore.”
• Expects sharper focus on the steel division and improved returns metrics.
• “Owing to sharper focus on steel business, potentially better returns and reduced carbon footprint, we raise the target multiple of steel business to 6x (from 5.5x).”