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Emkay Global
Jindal Stainless (Buy)
Target: ₹95
CMP: ₹75.75
Jindal Stainless (JSL) announced merger with Jindal Stainless (Hisar) Ltd (JSHL) to join the league of top 10 stainless steel companies globally. In our view, JSL may even enter the top 5 in the next three years as cash flow from JSHL will aid growth at the Jajpur plant.
The merger ratio of 195 shares of JSL for every 100 share of JSHL is based on the market approach as per SEBI guidelines. We derive a swap ratio of 280 shares of JSL for every 100 share of JSHL, valuing the ICL given to JSL and equity holding of JSHL in JSL at a 20 per cent holdco discount. This is an all-stock deal, hence no cash outflow is expected.
The merger will require approvals from SEBI, lenders, shareholders and NCLT. Being part of the same promoter group, CCI approval is not required. We do not expect any major hurdle in completion of the process, which is likely to be completely by H2-FY22.
We arrive at a transaction multiple of 3.3x for JSHL and 6.5x for JSL, implying that JSL has been assigned a higher value.
We upgrade JSL to Buy, given the growth potential of JSL combined with the financial strength of JSHL balance sheet. Elimination of ICL and equity holding of JSHL in JSL should also boost valuation of the merged entity.
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