Event update: Jindal Steel & Power (Outperformer) - A boost of iron ore
Event
The Supreme Court of India allows JSPL to lift 12mt of iron ore inventory lying in mines of Sarda Mines Pvt Ltd (Sarda Mines), however, subject to actual payment of penalty dues of ~Rs9.33bn by Sarda Mines. Today, JSPL management on media confirmed that Sarda Mines has paid the dues to Odisha Govt.
Details
- JSPL used to procure iron ore from Sarda Mines Ltd. till Mar, 2014. Post that, Odisha’s Directorate of Mines ordered closure of Sarda mines owing to expiry of EC and excess mining. JSPL had ~12mt of inventory lying in Sarda mines on 31st Mar, 2014 on which royalties were already discharged.
- Due to closure of Sarda Mines, JSPL was not allowed to transport its iron ore inventory from the mines. As a result, JSPL moved to Odisha HC against Odisha Govt and received a favourable order from HC in Apr-16. Subsequent to that, Odisha Govt challenged the court order in SC.
- On 30th Jan, 2020, SC allowed JSPL to lift ~12mt inventory lying in Sarda Mines subject to actual payment of penalty dues by Sarda mines. Sarda Mines, earlier, took undertaking to pay penalty of Rs9.33bn by Feb 2020. The sale proceeds of iron ore/ savings on captive usage, will be deposited in an escrow account of SBI which will be treated as debt repayment.
- Earlier, SC allowed Sarda mines to restart operations at its mine subject to undertaking payment of penalty dues. Today, JSPL management on media confirmed that Sarda Mines has paid the dues to Odisha Govt.
- Hence, we believe that JSPL can start transporting iron ore inventory by Feb-end. Along with it, the reopening of Sarda mines will provide iron ore even in FY22 as Sarda mines can produce ~6mtpa iron ore with an EC valid upto Aug-21.
Our view: Reiterate it as our top pick with TP of Rs289
We expected a favourable outcome and had already factored in the benefits of the same in our FY21 numbers (benefits included in other income). Securing ~12mt of iron ore (~1 yr requirement), in a rising price scenario, puts JSPL in an advantageous situation. In a rising iron ore and steel prices environment, we expect JSPL to benefit from the upside in the steel prices and thereby, expand margins. Moreover, the purchase of iron ore from Sarda mines will help in saving on freight cost and increase JSPL’s pellet plant utilisation. The above two development not only insulates JSPL from higher iron ore prices to a major extent in FY21 & FY22 but will help in deleveraging its balance sheet faster. We value the steel business at 5.5x FY21E EV/EBITDA at Rs219/sh and 3,400MW power business at Rs70/sh (DCF basis).
Jindal Steel & Power is engaged in the manufacture of rails, parallel flange beams and columns, plates and coils, angles and columns, rebars, wire rods, fabricated secions, speedfloor, semi-finished products, power, minerals and sponge iron.
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