JSW Steel - Implements resolution plan for Bhushan power & steel - ICICI Securities

We view JSW Steel's (JSTL) announcement of the implementation of the resolution plan for the eventual acquisition of Bhushan Power and Steel (BPSL) as timely. The accumulated cashflows over FY19-21E, as per our estimate, can be ~ Rs45-50bn. This can significantly improve the return dynamics of the acquisition for JSTL's minority shareholders. BPSL will be initially held in a SPV - Makler, held by Piombino steel (PSL) - previously a 100% owned subsidiary of JSTL. However, through issue of convertible debentures and subsequent conversion of the same, JSW Shipping and Logistics, a group company now owns ~ 51% of PSL, while JSTL owns the rest. Thus, BPSL will not be consolidated into JSTL's accounts, unless at a future date JSTL decides to convert the debentures it has infused into PSL. If the steel upcycle prolongs, the accelerated deleveraging at BPSL can accrue value to JSTL's shareholders - not meaningful though in our view. Maintain SELL.

- Timing couldn't have been better for implementation of BPSL's resolution plan. We believe that FY19-21E cashflow accruing to JSTL can be of the order of ~Rs45-50bn (assuming minimal capex). One needs to understand the extent of working capital investment, yet Rs45-50bn cashflow accrual can significantly improve leverage. As per the financial proposal of the successful bid by JSTL (available in MCA website), ~Rs 198bn was provided under the resolution plan.

- While deleveraging will improve return dynamics of BPSL acquisition for JSTL shareholders, it may not be significant. FY14-18 average EBITDA for BPSL was Rs 16bn. While JSTL may help improve utilization and value mix, yet leverage of Rs 198bn to start with and perhaps Rs 140-150bn now, may not easily help generate shareholder returns for JSTL's minority.

- Structuring has been done so as to keep the asset separate for the time being, under the Makler SPV. JSTL has guided all through that the acquisition will be in a separate SPV allowing for better risk management and not burdening the balance sheet of JSTL with the acquisition debt at the outset. Rs 86.1bn has been arranged in PSL through a combination of equity issued to the company, optionally convertible debentures to both JSTL and JSW Shipping and Logistics and debt availed. Rs 50.9bn has been invested in PSL by JSTL through equity and optionally convertible debentures (majority being convertible debentures). Rs 85.5bn has been invested into Makler SPV; Makler has also availed short term loans to finance the acquisition. Eventually Makler SPV will be merged with BPSL making PSL 100% owner of BPSL. However, since JSW Shipping and Logistics has converted the debentures of PSL into equity, current ownership of JSTL into PSL and subsequently BPSL is limited to 49%.

Cashflow accrual from FY19-21E can be Rs 45-50bn as per our estimate. This can help reduce the total outgo from Rs198bn to Rs140-150bn. Through cycle EBITDA, unless meaningfully ramped up, need not be value accretive even at these acquisition price.

Valuation - Maintain SELL

We maintain SELL with a target price of Rs292/share. We maintain P/B of 1.2x on FY23E book value.

Key risks

Key upside risks to our earnings and target price are i) Steel prices staying higher for longer - clearly a low probability event as corrections in the secondary market has already started and ii) Higher than expected debt deleveraging as management curtails capex plans - another low probability scenario in our view. Downside risks are i) lower steel prices and more importantly lower spreads given that peak spreads are estimated to be reached at Q4FY21 and ii) higher raw material integration benefits.

Shares of JSW STEEL LTD. was last trading in BSE at Rs.467.55 as compared to the previous close of Rs. 444.95. The total number of shares traded during the day was 569789 in over 7231 trades.

The stock hit an intraday high of Rs. 470 and intraday low of 450.1. The net turnover during the day was Rs. 264649485.

Source : Equity Bulls

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