Jindal Steel to sell power unit for $975m to JSW Energy

New Delhi: Jindal Steel & Power will sell its 1,000-megawatt generator in central India to JSW Energy as the company kicks off a restructuring plan to boost finances.
Mumbai-based JSW will pay at least Rs40 billion ($600 million), excluding net current assets, according to an exchange filing. Jindal Steel will be paid an additional Rs25 billion if the unit secures a long term power purchase agreement, according to the filing. JSW is controlled by Sajjan Jindal, while his younger brother Naveen Jindal manages Jindal Steel. Both are sons of billionaire Savitri Devi Jindal.
The sale of the plant, once Jindal Steel’s main cash cow, shows the difficulties Indian power producers face amid sluggish power demand and a slump in the spot rates of electricity. Steel, the company’s other business, has also suffered as a deluge of imports from China, Japan and Korea drove domestic prices down. For JSW, the acquisition follows its purchase of Jaiprakash Power Venture’s hydro power plants in September.
Jindal Steel has formed a committee "to explore and evaluate various restructuring options” in order to "streamline” the group’s cash flows and create a special purpose vehicle to raise funds via asset sales, according to its exchange filing. The revamp will entail hiving off the 1,000-megawatt plant in the state of Chhattisgarh into a SPV and transferring it to JSW Energy. The expected date of completion of sale is June 30, 2018, according to the statement.
Debt Burden
"Jindal Steel’s current cash generation is unable to meet the needs of its annual interest obligations,” said Saumil Mehta, an analyst at IDFC Securities said. "A valuation below Rs50 billion will be negative for the stock.”
Jindal Steel had a debt of Rs425.3 billion as of December 31, according to data compiled by Bloomberg. The company has an interest obligation of around 50 billion rupees every year, Mehta said.
In September, JSW completed the acquisition of Jaiprakash’s 1,391 megawatts of hydro-power plants, boosting its generation capacity to 4,531 megawatts. The company is also in talks to acquire Jaiparakash’s 500-megawatt thermal power plant in central state of Madhya Pradesh and with Monnet Ispat & Energy to buy its 1,050-megawatt power plant in the eastern Indian state of Odisha. JSW plans to expand its power portfolio to 11,500 megawatt, according to its website.
The risk-reward of the acquisition seems unfavorable for JSW, considering Jindal’s plant, located in central state of Chhattisgarh, doesn’t have a long-term power purchase agreement with buyers and is battling fuel issues, JPMorgan Chase analysts led by Sumit Kishore, said in an April 18 report.
Jindal Steel shares jumped 3.3 per cent to Rs71.20 in Mumbai on Wednesday. The stock has declined 26 per cent so far this year, compared with a 3.6 per cent drop in the benchmark S&P BSE Sensex.