Jindal to Sell Power Plant for $975 Million to JSW Energy

  • Jindal Steel starts restructuring with plant sale to JSW
  • Sale expected to be completed by June 30, 2018: filing

Jindal Steel & Power Ltd., which has reported losses for six straight quarters, will sell its 1,000-megawatt generator in central India to JSW Energy Ltd. as the company kicks off a restructuring plan to improve finances.

Mumbai-based JSW will pay at least 40 billion rupees ($600 million), excluding net current assets, according to an exchange filing. Jindal Steel will be paid an additional 25 billion rupees if the plant secures a long-term power purchase agreement and fuel security, Sanjay Sagar, JSW Energy’s chief executive officer, told reporters in Mumbai on Wednesday.

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 coal-fired 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 Ventures Ltd.’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.

The deal needs various regulatory approvals, including that of the Competition Commission of India, and involves JSW Energy paying an interest-bearing advance of 5 billion rupees to Jindal Steel, according to the statement. The two year timeline would allow Jindal Steel to get all the necessary approvals, Sagar said.

Jindal’s plant is debt-free and its purchase will be funded by a mix of debt and equity, JSW Energy’s Finance Director Pramod Menon said without specifying further.

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 Ltd. “A valuation below 50 billion rupees will be negative for the stock.”

Jindal Steel shares fell 3.6 percent to 66.50 rupees in Mumbai. The stock has declined 30 percent so far this year, compared with a 3.9 percent drop in the benchmark S&P BSE Sensex. JSW Energy closed little changed at 66.65 rupees.

Jindal Steel had a debt of 425.3 billion rupees as of Sept. 30, 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 Jaiprakash’s 500-megawatt thermal power plant in central state of Madhya Pradesh and with Monnet Ispat & Energy Ltd. to buy its 1,050-megawatt power plant in the eastern Indian state of Odisha. 

JSW is on course to achieve 10,000 megawatts of generation capacity by 2020, Sagar said. “We continue to look at right assets at the right price,” he said. “We have the appetite.”

The risk-reward of the acquisition seems unfavorable for JSW, considering Jindal’s plant doesn’t have a long-term power purchase agreement with buyers and is battling fuel issues, JPMorgan Chase & Co. analysts led by Sumit Kishore said in an April 18 report.

Jindal Steel was among companies that lost their coal-mining permits after India’s Supreme Court canceled the allotments in 2014, calling them illegal and arbitrary. The nation then moved to a system of auctions. The government rejected the company’s bids for two mines in the first auction round last year, a decision Jindal Steel challenged in court.

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