SJVNL IPO Review

Investors with a long-term horizon can subscribe to the initial public offering from the hydro power generation company, Satluj Jal Vidyut Nigam (SJVN).

Despite sound earnings prospects, the offer appears inexpensively priced compared with peers. At Rs 24.7 (the retail offer price at the upper-end of the price band), the offer values the stock at a price-earnings multiple of about 10 on estimated earnings for this fiscal. The price-to-estimated book value is 1.25 times. This is at a discount to NHPC's valuation of 1.53 times.

This despite SJVN having a superior return on equity (estimated at 15.5 per cent for 2009-10) than NHPC (8.3 per cent). The company also scores due to low leverage and better net profit margins than its listed peer. Earnings potential may also receive a boost from the revised CERC norms, which are yet to take effect. The dividends paid out in 2008-09 would result in a 3.13 per cent yield for the stock.

SJVN operates the 1500 MW Nathpa Jakhri Hydro Power Station project, a run-of-the river project on the Sutlej River in Himachal Pradesh. The company plans to increase this capacity to 5,500 MW over the next 10 years.

During FY-10, this project generated 7017 million units of power as against the annual design energy generation of 6,612 million units. The plant availability was 102 per cent wll above its normative plant availability factor.

The regulated tariff regime for SJVN results in pass through of interest rate fluctuations, hydrology risk, operations and maintenance and depreciation. Therefore, the company's earnings will continue to rise as long as it expands its power output and maintains higher plant availability.

CERC's new norms for power projects which promise higher return on equity are yet to be applied to SJVN, and this holds potential to boost profits. SJVN stands to benefit to greater extent than NHPC from these new norms, due to its higher equity component.

The Nathpa Jakhri project calculates its annual fixed charge, the key component in calculating tariffs, at a debt equity of 1:1 compared to 70:30 followed by NHPC. Higher efficiency and plant availability also place the company in a good position to earn higher incentives. However, the earnings growth over the next three years may remain muted, given that limited capacity additions are planned in this period.

The first of the additions — the 412 MW Rampur project — is expected to come up in 2013 and will add 27.5 per cent to the existing capacity. This project may entitle the company to carbon credits, which it can later trade to augment revenues.

The Rampur project is a cascade project for Nathpa Jakhri, which would mean that the water would be already de-silted, lowering the silt costs for the company. While hydro projects have several advantages, being a renewable energy source with nil fuel costs, the primary challenge lies in executing the projects. Delays and associated cost overruns are normal. Even in SJVN's case, the 412 MW Rampur project was to have been commissioned in the Eleventh Plan, but is now expected to suffer a delay of one-and-a- half years, due to the slow progress of the head-race tunnel.

SJVN also has seven other projects that are set to be commissioned between 2016-20. This includes the 775 MW Luhri in Himachal Pradesh; the 900 MW Arun III project in Nepal and the 1,500 MW Tipaimukh project in Manipur (a JV in which SJVN will have a 26 per cent stake).

All projects except Arun III are regulated-tariff-based and have no short-term power opportunities. However, given the seven-eight year gestation period between the initiation of the project and actual implementation, hydro projects may entail a high opportunity capital cost with the probability of overruns.

That more than 60 per cent of the projects are to come up over a decade, may put pressure on SJVN's returns. Another risk the company may face is that of regulated tariffs being reset after five years.

The requirement that the company supply free power (12 per cent of capacity) to the state in which it is setting up the project, is also a drag on returns. While it hasn't signed power purchase agreements for 4,000 MW of the planned projects, given the high demand-supply gap and lower regulated tariffs, the output is likely to find ready takers.

Comfortable on funding

The total funds required for 2,500 MW of additional projects is more than Rs 13,000 crore. But the fact that their commissioning will be spread out over a period of a few years means that it would be easier to fund the projects.

Currently SJVN holds Rs 1,487 crore as cash . This coupled with internal resources should be adequate to take care of funding, at a normative debt:equity of 70:30. It is expected to invest excess of Rs 4,100 crore as part of equity, of which it has already incurred Rs 940 crore.

Financials

Internal accruals are strong. SJVN usually sees higher generation during the May- September period as the snow melts. The sales and net profit grew at an annual rate of 5 per cent and 6.5 per cent respectively during the period 2004-09. For the nine months ended December ‘09, net profits were Rs 775 crore, higher than that for FY-09 (Rs 759 crore), with net margin improving to 51 per cent.

Issue details

The proceeds from this issue for the government is expected to be a maximum of Rs 1054 crore at the price band of Rs 23-26.

via BL