EQUITIES

Jindal Steel rating: Buy — Raise target price to Rs 240

We currently expect net debt/EBITDA of 3.4x by the end of FY22.We currently expect net debt/EBITDA of 3.4x by the end of FY22.

JSP has accepted a binding offer to divest its entire stake in Oman Steel plant for $1bn to a promoter group company. Potential divestment should bring down FY22 net debt by c27% and reduce interest outgo. Volume growth continues to surprise positively. We raise estimates and TP to Rs 240 (from Rs 190) and reiterate ‘Buy’.

JSP accepts binding offer to divest steel plant in Oman: JSPL’s subsidiary, Jindal Steel & Power (Mauritius) (JSPML) has accepted a binding offer from Templar Investments (promoter group company) to divest its entire stake in the Shadeed Iron and Steel (Shadeed) plant located in Oman for an enterprise value slightly in excess of $1 bn.

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Shadeed has hot metal capacity of 1.8 mtpa, a steel melt shop (SMS) of 2.4 mtpa and a bar rod mill of 1.4 mtpa. Shadeed reported EBITDA of $145 million in FY20 ($180m in FY19), accounting for c13% of consolidated EBITDA. The offer values Shadeed at 7.25x FY20 EV/EBITDA, broadly in line with the multiple we apply to the India Steel sector (7x).

The transaction is subject to approval by shareholders ofJSPL and lenders of Shadeed. JSPL expects the transaction to close by July 2020.

As part of the transaction, $800-million debt related to Shadeed will be transferred to the acquirer and the equity value of c.$251 m will be paid through a mix of cash and takeover of JSPML liabilities.

JSP has significantly reduced its net debt in the past two years, from cRs 450 bn to cRs 360 bn. As a result, the net debt to EBITDA has improved from 7x in FY18 to 4.6x in FY20. While the divestment will potentially result in JSP’s FY22e EBITDA reducing by 12%, FY22e net debt should fall sharply by 27%.

We currently expect net debt/EBITDA of 3.4x by the end of FY22; however, potential divestment could significantly accelerate deleveraging for JSP as net debt/EBITDAwould fall to 2.8x (not our base case).

Despite lockdown, JSP reported 5% y-o-y production growth in April 2020. The company also posted massive 28% y-o-y growth in standalone shipments in May 2020.

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