SJVNL IPO Analysis

SJVNL (Satluj Jal Vidyut Nigam) is a hydroelectric power generation company originally established as a joint venture between the government of India and the Himachal Pradesh government to develop and operate the Nathpa Jhakri Power Station (NJHPS). NJHPS is the largest operational hydroelectric power generation facility in India by installed capacity (based on information published by the Central Electricity Authority), with an aggregate generation capacity of 1,500 MW. It is located on the Sutlej River in Himachal Pradesh.

In October 2003, the first 250-MW hydroelectric power generation unit was commissioned at the NJHPS. By May 2004, all six power-generating units at the NJHPS had been commissioned and the NJHPS was fully operational. NJHPS generated 6,014 million units (MU)), 6,449 MU and 6,609 MU of power (gross) in the years ended March 2007 (FY 2007), FY 2008 and FY 2009. The aggregate power generation (gross) by NJHPS amounted to approximately 6,332 MU in the nine months ended December 2009,

SJVNL is required to supply 12% of its annual generation from the NJHPS free of cost to Himachal Pradesh. Out of the remaining 88% of power generated by the NJHPS ( to be reduced by 1% to 87% in the event the company is required to supply power to the local area development fund), 25% is supplied to Himachal Pradesh and the remainder to various states located in the northern region of India pursuant to the 10 long-term power purchase agreements. Of these, two have expired and are in the process of being renewed.

In addition to NJHPS, SJVNL has one project under construction and seven other projects under various stages of implementation. The company is constructing the Rampur project, a 412-MW hydroelectric power generation facility located downstream from the NJHPS. The Rampur project is to be completed and commissioned in 2013. It has also been awarded the rights to develop and operate two hydroelectric projects, with expected aggregate generation capacity of 825 MW by Himachal Pradesh (with a 51% participation interest in each).

SJVNL has entered into memoranda of understanding with the Uttarakhand government for three hydroelectric projects, with aggregate generation capacity of 363 MW. The company has agreed to participate in a joint venture with NHPC and the Manipur government for the development and operation of a 1,500-MW hydroelectric power project in the state. It has diversified to target hydroelectric power projects available outside India, and has been awarded the rights to build-own-operate-and-transfer (BOOT) a 900-MW hydroelectric power project in the Sankhuwasabha district of Nepal, through participating in a competitive tender held by the Nepalese government.

The expected capacity addition from all these projects is 4,000 MW (412 MW from the Rampur project and 3,588 MW from the other seven projects).

SJVNL has agreed to take a minority interest in a joint venture to develop a transmission line in India. This will be part of a transmission line expected to connect Dhalkewar in Nepal to Muzaffarpur in India. The company will expand to providing technical advisory and consultancy services.

SJVNL has lined up an initial public offer (IPO) of Rs 41.50 crore at a price band of Rs 23 to Rs 26. The IPO is opening on 29 April 2010 and closing on 3 May 2010. This is an offer for sale of the government of India's equity shares, representing 10.03% of the paid-up capital of the company. Accordingly, it will not receive any proceeds from the offer. All the proceeds, less offer expenses, will be received by the selling shareholder. The company is offering 5% discount to employees and retail investors.

Strengths

* Has historically been able to achieve high levels of operational efficiencies, reflected in the high average capacity indices for the NJHPS. Under the previous tariff regulations, which were effective during this period, was entitled to certain incentive payments based on its capacity index levels, as determined by the Northern Regional Power Committee (NRPC). Under the new performance-based tariff regime, will be entitled to these incentive payments only if monthly plant availability factor exceeds a pre-determined normative annual plant availability factor. For NJHPS, this is 82%. According to data published by the NRPC, the annual plant availability factor (calculated as the average of monthly plant availability factors in the period) for NJHPS was 92.4%, 96.7% and 96.1% in FY 2007, FY 2008 and FY 2009, respectively, exceeding the normative annual plant availability factor of 85% applicable to NJHPS in those years.

* Has experience in the development, execution and management of mega-hydroelectric projects through the development and operation of the 1,500-MW NJHPS, the largest hydroelectric power generation facility in India by generation capacity, located in the geo-technically sensitive Himalayan region.

* Has an established track record of operational excellence. Since the commissioning of NJHPS, it has consistently met or exceeded government-set performance targets for its operations. Has been upgraded to a Schedule A public sector undertaking and designated as a mini-ratna category-I public sector undertaking in recognition of its efforts.

Weaknesses

* Development of hydroelectric power projects typically requires a longer period of time compared with other power projects such as thermal power projects. Further, development of hydroelectric power projects may be subject to unexpected complexities and delays. There are a number of factors such as delays in the land acquisition process and associated resettlement and rehabilitation issues, geological, hydrological and climatic conditions that may cause delay or cost overruns. Hence, timely execution of the project is the key.

* There have been instances in the past when state governments, or the government of India, decided to transfer the rights to construct and operate hydroelectric power projects, originally awarded to certain parties, to other competing power developers.

* Required to supply 12% of its annual generation from NJHPS free of cost to Himachal Pradesh.

Valuation

Sales income increased 9%, gross generation 6% and PAT 37% in the nine months ended December 2009 over the nine months ended December 2008. However, due to seasonality in business, figures cannot be annualised. Sales (net) stood at Rs 1490.78 crore and PAT at Rs 759.32 crore in FY 2009. On post-IPO equity of Rs 4136.63 crore, the EPS for FY 2009 works out to Rs 1.8. The P/E is 12.5-14.2 times at the offer price band of Rs 23-Rs 26. In comparison, NHPC's consolidated EPS for FY 2009 stood at Re 1 and P/E 30 times at the current market price. The Price/Book Value (P/BV) of SJVNL is 1.4 – 1.6 times, while that of NHPC is 1.6 times.