SUPREME COURT HAS REJECTED JSW STEELS 2019 RESOLUTION PLAN FOR BHUSHAN POWER AND STEEL

News: As per media reports, the Supreme Court has rejected JSW Steel’s 2019 resolution plan for Bhushan Power and Steel (BPSL), declaring it as illegal, and ordered the liquidation of BPSL’s assets. Under the plan, JSW had offered ₹19,350 crore to financial creditors and ₹350 crore to operational creditors, which was paid in March 2021. The Supreme Court cited two key reasons for rejection: (a) the use of a mix of equity and optionally convertible debentures (OCDs) instead of a pure equity structure, and (b) failure to implement the plan within the timeframe set under insolvency law. In response, JSW Steel informed the exchanges that it has not yet received the formal Supreme Court order and will decide on the further course of action post review.

View: This is an unfavourable development for the company, especially as it recently expanded BPSL’s capacity from 3.5 MTPA to 4.5 MTPA, accounting for ~13% of JSW’s India capacity (34.2 MT). BPSL also contributes ~13% of consolidated steel sales volume and ~10% of EBITDA, making the liquidation order a major earnings risk for the company. We await management take on this. However, our back of the envelope calculations suggests potential loss to JSW Steel if BSPL is liquidated in the range of ₹ 8,500 crore – 13,000 crores (i.e. ₹ 35-55/share). This is calculated as ascribed EV in our target price calculation as ~₹ 32,000 crore (8.5x EV/EBITDA on FY27E EBITDA of ~₹ 3,800 crore) minus the recoverable amount paid by JSW Steel i.e. ~₹ 19,500 crore paid at the time of acquisition and ~₹ 4,150 crore as capex incurred post-acquisition till date. While the stock was already down 5.5% in Friday’s session and we don’t expect a sharp further decline. However, this ruling now clouds JSW’s growth plans, as BPSL was expected to contribute ~20% (10 MT) of its targeted India capacity of ~50 MT by FY31. We await management’s comments on the course of action, as well as the impact on its growth strategy and cash flows.

Impact: Negative