JSW Energy Ltd: Buy

CMP: Rs.77.90

The stock of JSW Energy Ltd after correcting significantly from Rs.126 in a year, is trying to consolidate and look up now. Though major concerns due to subdued demand and realisations, and increasing debt led by acquisitions, still remains. 

JSW Energy sells power through combination of long-term and short-term Power Purchase Agreements (PPAs). JSW Energy Ltd's management in June, 2016 said: “For sale of its power, the company participates in bids sought by power procurers and has participated in a recent tender floated by Power Company of Karnataka Limited (PCKL) in which bids were opened yesterday and thereafter the bids are to be evaluated, processed and approved by various authorities prior to placement of any order/contract”. 

The company further made the clarification with reference to the news flashed on CNBC TV 18: "JSW Energy is second lowest bidder in Karnataka SEB PPA and may get 750MW PPA contract. Rate can be around 4.38/unit.

Photo: Live Mint

The bid involves the 860 megawatts Vijayanagar power plant in Karnataka, which right now is operating on short-term power contracts. Thanks to the plant’s location advantage—situated in high power deficit southern India—JSW Energy had managed to get sufficient buyers, and that too at a good price, till now.

Whenever any proposal results into execution of binding documents, the company will comply with the provisions of the Securities and Exchange Board of India, it added.

Meanwhile, the hydro power assets’ acquisitions, saw the company’s generation rise 12 per cent year-on-year to 6,052 million units, excluding it volumes were flat. Good monsoon, has already increased the optimism, in the hydro-power units. 

It concluded the acquisition of Himachal Baspa Power Company Limited (HBPCL) adding 1,391 MW of hydroelectric capacity consisting of two hydro power projects - 300 MW Baspa-II and 1,091 MW Karcham Wangtoo in Himachal Pradesh. This acquisition helped the company in diversifying the power generation portfolio with high quality hydro power assets, besides increasing the share of long-term power purchase agreement in its basket.

JSW Energy Ltd has also agreed to acquire the 1,000MW (4X250) thermal power plant located at Tamnar, Chhattisgarh from Jindal Steel & Power Limited (JSPL). JSW Energy has also got fair trade regulator CCI's approval to acquire this 1,000 MW power plant in Chhattisgarh from Jindal Steel and Power Ltd (JSPL).

Under the deal announced in May, the Sajjan Jindal-led firm was to purchase the power plant in Raigarh for Rs.6,500 crore with certain conditions.

JSW Energy Ltd has been evaluating interesting opportunities for inorganic growth. With significant assets in the sector being stressed, a meaningful engagement with lenders will be essential to evaluate and conclude deals in the space. 

The ever-growing power demand in the country, large capacity addition plans, rising availability of fuel resources and falling prices of the same, portrays a positive outlook for the sector. Progressive policylevel changes and effective implementation of directives promise enormous opportunities for various stakeholders and market players. Improvement in the financial health of State Electricity Boards and the gamut of Government’s initiative will also boost demand.

As base load deficits narrow down, the company's strategic intent is to transform the business model to that of a utility company with stable cash flows, by tying up a substantial part (85%-90%) of its power capacity under medium/long-term PPAs.

But as transmission congestion in the region eased and stranded gas capacities came back on stream, short-term or merchant power prices began to fall. This impacted JSW Energy’s realizations, which fell 8% in 2014-15 and 3% in the last fiscal year. With merchant power rates remaining depressed and the Union government encouraging state utilities to purchase short-term electricity contracts through competitive bidding or reverse auction system, the firm’s realizations are expected to remain under pressure. The concerns have made analysts cautious, with some even paring their earnings estimates for the current and next fiscal years.

JSW Energy Ltd in July, 2016 said that its subsidiary has sold 26% stake in South African Coal Mining Holdings Ltd (SACMH) to meet regulatory norms.

“JSW Energy Natural Resources South Africa (PTY), a step down subsidiary of the company in South Africa has disposed of 26% stake in its subsidiary, South African Coal Mining Holdings (SACMH),” JSW Energy Ltd informed the BSE.

While its acquisition-led strategy is positive given the time and effort required to establish new capacities, increased debt at a time when industry’s generation is exceeding demand and merchant power realisations are subdued, has highlighted the Street’s concerns.

Caution also prevails on average realisations looking at grid synchronisation by end-2016. JSW Energy has one of the highest shares of short-term (less than a year) electricity sales among the listed power utilities. In the  last fiscal year, 47% of its sales came from short-term contracts. 

Factoring all these concerns and the share price correction, some analysts feels that an upside potential of 15-20% from the CMP of Rs.77.90 is possible. JSW Energy is engaged in the business of power generation, power trading and transmission, and mining and equipment manufacturing. 

Bibliography: (i) The Business Standard
                      (ii) Live Mint, etc