JSW Energy IPO Review

Strong visibility

Power generation capacity is planned to go up from 860 MW to 3,140 MW in various phases by April 2011

JSW Energy (JSWEL), incorporated in 1994, is part of the JSW group headed by Sajjan Jindal, which is in turn a part of the OP Jindal Group. JSWEL is the holding company for the JSW Group's power business. The company currently owns and operates thermal power plants with an aggregate generation capacity of 860 MW, all in Karnataka.

Currently, the company is augmenting its power generation capacity on its own or through subsidiaries and has about 2790 MW of generation capacity under construction. Of the 2,790 MW under implementation, the 4X300 MW Ratnagiri power project is being developed through its 100% subsidiary JSW Energy (Ratnagiri) (JSWERL). Similarly, the 8X135 MW Phase I and 2X135 MW Phase II of the lignite based Balmer power project is being developed through its wholly owned subsidiary Raj West Power (RWPL). However, the 3X80 MW Kutehr Hydel power project in Himachal is being executed directly by the company.

Over and above this 2,790 MW of generation capacity under implementation, the company also has power projects aggregating to a generation capacity of 7740 MW at early stage of development.

Though majority of the revenue comes from power generation, the company is one of the early power traders. It also provides operation and maintenance services for power plants of group companies and gets operation & maintenance (O&M) fees for that service. Similarly, it also offers power project management service to group companies over and above the captive requirements. JSWEL has also got into lignite mining and development of transmission network through various joint ventures, primarily to feed its power plant or to facilitate evacuation of power generated from its stations. With the Maharashtra State Electricity Transmission Company (MSETCL), it has set up Jaigad PowerTransco to execute 169 KM of transmission line. The company holds a 74% stake in the JV company. Similarly, it has signed JV with Rajasthan State Mines and Minerals (RSMML) to develop and operate the lignite mines for the supply of lignite to the Balmer Power Project of the company. It has incorporated Barmer Lignite Mining Company, where it holds a 49% stake, with the balance 51% held by RSMML.

The company has supply agreement with JSW Steel for supply of fuel (either coal or corex gas) for its 2X130 MW SBU I at Vijay Nagar. For 2X300 MW SBU II, the company currently gets coal from the open market. But it has signed a long-term coal supply agreement for 25 years with Sungai Belati of Indonesia. Similarly, it has signed a 25-year supply agreement with Sungai Belati for its Ratnagiri power project. However, for the Balmer power project, the company has got captive lignite mines in Rajasthan, which were to be developed and operated by Balmer Lignite Mining Company, a JV company of JSWEL. Moreover, the JSW group has 11% interest in a consortium that has been allotted a coal block from the Utkal A�Gopalprasad West mines near Talcher, Orissa. The coal will be supplied to the Chattisgarh power project of the company.

Of the total issue proceeds, the company proposes to utilize Rs 2142.53 crore to part finance power projects aggregating 2790 MW of generation capacity and the lignite mining as well as the transmission line projects. The company also proposes to retire debts of Rs 470 crore from the issue proceeds and the balance will be used for general corporate purposes.

Strengths

The company has experience and track record in developing and operating power generation plants, with its first power generation unit been commissioned in 2000 and running efficiently since these 9 years.

Currently, the company has 860 MW of operational power generation capacity at Vijaynagar, Karnataka. Further, it has also commissioned the first unit (135 MW) of the 8X135 MW Balmer power plant of RWPL in Rajasthan. Moreover, the company expects to commission another 570 MW of capacity comprising 2X135 MW of RWPL's 1,080-MW Balmer Phase I power plant and the first unit of JSWERL's 1,200-MW power plant in Maharashtra by March 2010. As per the implementation schedule given in the prospectus, all the remaining units of 1,080-MW Balmer power plant of RWPL as well as JSWERL's 1,200-MW projects will be commissioned by April 2011. The management feels it is currently ahead of schedule. Hence, by April 2011, the company will have an operational generation capacity of 3,140 MW. This gives strong revenue visibility for the company.

As of now, of the total 3,140 MW of power generation capacity, to be on stream by April 2011, the company has long-term power off-take agreement of 62-63%. The balance is to be sold through merchant sales. The company is looking for long-term power off-take agreement because, as per projections, the current high merchant power tariff will eventually converge with long-term power tariff, with increased supply over the next five years. It will, therefore, participate in the long-term power supply tenders called by utilities. But, at the moment, the high exposure to merchant power sales will allow the company to capitalize on the high merchant power tariff currently prevailing in the country.

Weaknesses

All the thermal power projects, both commissioned and under implementation (except the lignite linked Balmer power project), are based on imported coal. Given the fact that the merchant power tariff is driven by demand and supply, any surge in price of imported coal will affect the margin of merchant sales. Moreover, the merchant power tariff is also subjected to regulations. In September 2009, CERC capped the merchant power tariff to Rs 8 for a short period of 45 days. The states are now empowered to compulsorily sell the power generated within their boundary to the state utilities in case of severe shortage. The government of Karnataka, during December 2008 to May 2009, asked all the generation companies in Karnataka to sell power only to state utilities at a fixed price. A similar development may affect higher realization in merchant power sales. For instance, the company could not pass fully the rise in fuel cost in FY 2009. Thereby, there was contraction in the overall operating margin of the company for FY 2009.

The BLMC, the JV mining company between the company and Rajasthan State Miner and Minerals, which is to supply lignite to the Balmer Power Project of the company, is yet to commence mining operation pending completion of land acquisition. The company has applied to the government of Rajasthan for alternate fuel source for the project and has got in-principle approval to use imported coals as alternative fuel for a period of one year on the condition of RWPL gets the energy charges and the fuel costs determined by the RERC. Continued delay in land acquisition and mining to full capacity will affect the operation of this plant.

Baring the 260-MW SBU I, all other power projects are developed with Chinese power generation equipment and its long-term operational efficiency has to be seen.

As JSW Steel is expanding its captive power generation capacity, its captive requirement of corex gas is set to increase and its availability for JSW Energy's SBU I will decline, forcing the company to rely on domestic or imported coal for which it is yet to tie-up.

For the Ratnagiri project, the company had originally entered into an MoU with the government of Maharashtra for 1000 MW. But the company intends to expand the capacity to 1,200 MW and has applied to the Maharashtra government but is yet to get the approval. Similarly for the Rajasthan project, the company wants to develop additional 270 MW as Phase II in addition to the 1,080 MW in Phase I. But it is yet to get the approval of the government of Rajasthan.

Though it has entered into loan agreements or has obtained letters of intent from various banks for Rs 9979.5 crore of debts for its projects under construction, the company has not signed firm agreements with banks for projects under development in Rajasthan and Himachal Pradesh.

Valuation

Consolidated net sales of the company for the fiscal end March 2009 was up by 42% largely on account of improvement in average sales realization from Rs 4.48/ unit to Rs 6/ unit powered by higher merchant power tariff. However, the net profit after minority interest was lower by 14% to Rs 279 crore on the back of contraction in margin as the company could not fully pass on rise in fuel cost as well as absence of CER (certified emission reduction) income in FY 2009 as compared to Rs 327.56 crore of CER income in the corresponding previous year period.

The EPS for FY 2009 works out to Rs 1.7 at both the upper price band (of Rs 115) as well as the lower price band (of Rs 100). Thus, the PE on its FY 2009 earning works out to 58.8 times at the lower price band of Rs 100 and 67.6 times at the upper price band of Rs 115. In comparison, the largest player NTPC quotes at 21.3 times of its FY 2009 earning. Similarly, the NLC and Gujarat Industries Power quote at a PE of 18.7 times and 21.1 times FY 2009 earnings. However, if all goes as per plans, the 265% rise in its generation capacity over the next 15-18 months can power the company's earnings much faster than those of other power generation companies. The company has offered a discount of Rs 5 for retail investors.

via CM