Acquisitions will boost JSW Energy’s prospects

The takeover of 1.7GW projects seen as earnings accretive THE COMPASS

Shares of JSW Energy have attracted investor attention over the last month, and were up 4.8 per cent on Monday, too. The company’s improving prospects led by inorganic growth and its plans to double the power generation capacity over the next 35 years are keeping the Street bullish.

Among the latest developments is the acquisition of two power plants based in Odisha. JSW Energy is under discussions for acquiring GMR Kamalanga (1,050MW), and has received the Committee of Creditors’ approval to acquire Ind-barath Utkal’s under-construction thermal power plant (700MW). Since fuel supply agreements and power purchase agreements (PPA) are in place for both plants, the acquisitions are being looked at in positive light.

Of JSW’S existing 4.4GW capacities, more than 80 per cent is already under long-term PPAS and hence will generate predictable cash flows, while another 7 per cent could soon get tied up under the group’s captive needs, further de-risking cash flow, say analysts at Motilal Financial Services. These acquisitions will boost JSW’S growth.

Analysts say that while Utkal may have execution risks (refurbishment of Unit-1 and construction of Unit-2), implying that cash flows will start only from FY22, they expect these acquisitions to be return on equity (ROE) accretive. The GMR plant is operational and Rupesh Sankhe at Elara Capital expects it to generate 15-16 per cent ROE, which is along the guidance provided by JSW’S management.

Meanwhile, Utkal plant had a PPA with Tamil Nadu at a levelised tariff of about ~4.9 per kwh, which JSW plans to revive. Though there could be a downward revision in tariffs, analysts at JM Financial say that even assuming a lower tariff of ~3.5 per kwh, the Utkal acquisition appears value accretive as it can deliver ROE of about 40 per cent, given the deep debt haircut (more than 60 per cent) being taken by lenders to the project. Even if the PPA is not revived, assuming merchant sales at ~3.2 per kwh and coal purchases from e-auctions, the acquisition can still deliver 14-15 per cent ROE, they add. Not surprising, the Street sentiment is improving.

JSW ’s Q2 performance was aided by higher hydropower generation (lifting overall output), while lower fuel costs boosted the operating performance. Hydro power ’s net unit generation was up 9.3 per cent with plant load factor (or capacity utilisation) coming in at 102.7 per cent. Lower fuel costs, down 26 per cent year-on-year at a consolidated level in line with the declining international coal prices, meant that operating profit margins improved 910 basis points year-on-year in the September quarter.