Diversification lends positive charge

Why investors may hold on to the stock of SJVN, without seeking fresh exposure

The Centre targets 500 GW of installed capacity from nonfossil fuel sources by 2030 alongside additional thermal capacity of 93 GW by 2032. SJVN appears strategically positioned by diversifying its energy portfolio beyond hydropower and renewables, enhancing its future growth prospects.

SJVN’s stock has surged by 41 per cent YTD, currently trading at a premium forward pricetoearnings ratio of 28.7 times, compared to its twoyear average P/E of 13.5 times. However, the forthcoming thermal plant is poised to increase the company’s capacity by over half its current installed capacity.

According to Bloomberg consensus , SJVN is projected to experience revenue/PAT growth of 44/36 per cent CAGR in FY2326E. The company’s hydro and upcoming thermal project benefit from regulatorybased earnings. While solar and wind energy sources may pose intermittency challenges, hydropower’s flexibility can mitigate these issues.

Considering the balanced riskreward scenario, existing investors may hold on to their investments in SJVN. However, initiating fresh positions may not be advisable at this juncture.

BUSINESS

Established in 1988 through a joint venture between the Government of India and the Government of Himachal Pradesh, Satluj Jal Vidyut Nigam Limited (SJVN) operates India’s largest single installed hydro power plant capacity of 1,500 MW in Himachal Pradesh. The company’s energy portfolio comprises hydro (83 per cent), solar (13 per cent), and wind (4 per cent), with an overall installed capacity of around 2,377 MW. Revenue generation primarily stems from longterm power purchase agreements (PPAs) with State distribution utilities, supplemented by power trading, transmission, and consultancy segments.

The tariff structure for SJVN’s PPAs follows a costplus model regulated by the Central Electricity Regulatory Commission (CERC), ensuring a fixed ROE. Incentives are awarded for surpassing normative plant availability factors and contributing to grid stability. Additionally, SJVN extends its operations through wholly owned subsidiaries and joint ventures focusing on thermal, hydroelectric, renewable and power transmission projects in India and Nepal.

Additionally, SJVN has been appointed as a Renewable Energy Implementing Agency (REIA), the other three entities being SECI, NTPC, and NHPC. With this, it will be tasked to assess renewable energy demand from state discoms and solicit bids from developers, thereby earning a trading margin of ₹0.07/KWH.

PERFORMANCE

In 9MFY24, SJVN power generation declined 10 per cent YoY to 7,606.3 MUs owing to12 per cent drop in hydro generation, due to flooding in Himachal Pradesh during Q2FY24 and low water discharge.

Despite nearterm challenges in hydro generation, SJVN maintained a plant availability factor (PAF) exceeding 100 per cent for its main plants, Nathpa Jhakri HEP (NJHPS, 1500MW) and Rampur HEP (412 MW), since FY20, surpassing the Normative PAF (NAPAF) of 90 per cent and 85 per cent, respectively. This ensured full recovery of annual fixed charges and entitled the company to incentive income, totalling ₹2,10.3 crore in FY24.

Revenue from operations de

HOLD

SJVN ₹130.80 WHY

Premium valuation

Balanced risk-reward

Promising growth prospects creased by 14 per cent YoY to ₹2,096.46 crore in 9MFY24 primarily due to reduced hydro generation(17 per cent) in hydro power while the sales of renewable power (including solar and wind) increased by more than 50 per cent. The company reported a 36.6 per cent YoY drop in net profit to ₹850 crore for 9MFY24, leading to a margin contraction from 55.1 per cent to 40.6 per cent. However, the Bloomberg consensus estimates expect the full year revenue and profit in FY24 to grow by around 10 per cent and 6 per cent YoY, respectively. Falling short of the estimates may elicit a negative market response.

On a positive note, in March, the Himachal Pradesh (HP) High Court declared the State government’s imposition of water cess on hydropower generation as unconstitutional. This ruling is expected to yield considerable tax savings for SJVN, as 80 per cent of its installed (1,912MW) and upcoming capacity (658 MW) is based out of HP. The company’s D/E increased to 1.22 as of Q3FY24 from 0.77 in the corresponding period last year, while the interest coverage ratio fell to 4.5 times compared to 14 times.

This rise in leverage can be attributed to increased longterm and shortterm borrowings for the projects under construction and fluctuations in exchange rates on foreign currency loans. Nevertheless, the company’s management has planned to raise funding by monetisation of partial earnings of the NJHPS through Securitisation .

OUTLOOK AND RISK

SJVN has invested ₹3,800 crore out of ₹10,000 so far in the first half of FY24. Looking ahead, management aims for a capex of ₹12,000 crore in FY25. The company presently has an underconstruction capacity of about 4,778 MW, distributed across four hydro projects, one thermal project, and nine renewable projects, with capacities of 1,558 MW, 1,320 MW, and 1,900 MW, respectively. Additionally, SJVN is conducting feasibility studies for pumped hydro storage projects with a potential capacity of about 5,000 MW. Management has set ambitious targets, aiming for a capacity addition of 12 GW by FY26 and 25 GW by FY30.

Despite promising growth prospects, investors should exercise caution regarding the inherent risks associated with hydroelectric projects, such as geological uncertainties, potential time and cost overruns, legal complexities, and opposition from stakeholders. Further, as per CARE Edge Rating agency, the acquisition of favourable PPAs remains a crucial challenge in this sector.

However, it’s noteworthy that SGEL has successfully secured tieups for the entire 1,000 MW solar power capacity from the Bikaner Solar Power Project. Additionally, the upcoming Buxar thermal power plant, with a capacity of 1,320 MW and expected to commence operations by September 2024, has already secured a PPA for 85 per cent of its output with the Bihar State Power Holding Company Limited.

However, these positive developments are juxtaposed against concerns regarding premium valuation. Nonetheless, considering the balanced riskreward scenario, investors may find it prudent to maintain their holdings in SJVN’s stock.