JSPL To Divest Oman Business To Promoter Firm

A promoter group firm will acquire Jindal Steel and Power Ltd.'s entire stake in the company's Oman unit.

Jindal Steel & Power (Mauritius) accepted a binding offer from Templar Investments, a promoter firm, to divest the stake, according to an exchange filing. The deal values Jindal Shadeed Iron and Steel Co. at an enterprise value of more than $1 billion. The company didn't disclose other financial details of the transaction.

The divestment, the company said, is in line with JSPL's commitment to bring down its debt and deleverage its balance sheet. The deal, subject to shareholder and lender approvals, is expected to close in about a month.

"With an EV of $1 billion, the deal multiple work outs in the range of 4.5 times (at the lower end assuming FY18 Ebitda) to 7.2x (assuming FY20 Ebitda)," Vishal Chandak, analyst at Emkay Global Finance said. "The transaction is positive for the company and delivers on management's deleveraging strategy."

Jindal Shadeed's operating income fell from $221 million in FY18 to $181 million and $138 million in FY19 and FY20, according to company 's filings. The business has bore the brunt of downturn in steel cycle.

The Oman business reported $268 million revenue and $63.8 million operating income in quarter ended March. For the financial year ended March, Jindal Shadeed reported production at 1.87 million tonnes and sales at 1.88 million tonnes.

As of March, JSPL's consolidated net debt stood at Rs 34,758 crore compared with Rs 39,137 crore a year earlier. Trailing net-debt-to-Ebitda stood at 4.57 times against 4.66 times a year earlier.

Jindal Shadeed has a total debt of around $830 million ($750 million debt and $80 million other liabilities), according to Chandak. With this deal, JSPL's net debt should reduce from Rs 35,900 crore to Rs 28,900 crore and exceeds management's guidance for for FY21.

On Tuesday, JSPL shares rose 5.66% apiece on the BSE while the benchmark Sensex fell 0.13%.

Brokerage Views

Most brokerages remain bullish on Jindal Steel after it divested its entire stake in Oman business. But none of them revised their target prices as they await details on funding and exact deal size.

While Morgan Stanley expects this transaction to be value accretive to the extent of 7-10% to market cap, others expect Jindal Steel's debt to come down.

Investec

• Maintains ‘buy' with a target price of Rs 185 apiece.

• Jindal Shadeed's trailing EV/Ebitda of 8.4 times versus JSPL's at 6.4 times premium exit-valuations, a positive.

• Potential impact is up to Rs 30 per share on target price.

• Transaction will reduce net gearing by about 0.2 times on FY22 basis, a positive.

• Promoter company buying asset attracts concerns on health of holding company, incremental pledges, etc.

Morgan Stanley

• Maintains ‘overweight' with a target price of Rs 155 apiece.

• Sees value accretion of 7-10% to market cap from this transaction.

• A bigger re-rating trigger will be potential refinancing of the international debt.

• This transaction will help make the balance sheet lighter, although the liquidity situation will not improve significantly.

Motilal Oswal

• Maintains ‘buy' with a target price of Rs 166 apiece.

• The Oman business contributes an enterprise value of Rs 59 billion.

• Target price will rise by Rs 16 a share if the deal is finalised at $1.0 billion.

• Estimates Ebitda of $170 million for FY22, implying deal value of 5.8 times estimated FY22 EV/Ebitda.

• JSPL deal should reduce its debt by about 20% and net debt/Ebitda to 3.5 times.

Emkay Global

• Not Rated

• $1-billion Oman deal to cut debt by Rs 7,000 crore.

• With an enterprise value of $1 billlion, the deal multiple works out in the range of 4.5 times (at the lower end assuming FY18 Ebitda) to 7.2 times (assuming FY20 Ebitda).

• Transaction is positive for JSPL and delivers on management's deleveraging strategy.

• Waiting details regarding the funding of the transaction.