A long-term play

Today, power is among the most happening sectors as far as long-term growth opportunity is concerned. This is primarily due to the fact that huge investments are required to bridge the country’s power deficit and to meet the constantly growing demand driven by the growth in economy. JSW Energy is among the few players which have plans to make it big with a presence across the sector’s entire value-chain. To funds its plans, the company is coming out with an IPO. However, the trend seen in the recent IPOs by power companies has not been encouraging with the biggest issue being expensive pricing and their valuations. And, JSW Energy is little different on this count.

A good beginning

JSW Energy, which is a part of the Sajjan Jindal-led JSW group, is coming out with an IPO to raise Rs 2,700 crore to fund its growth plans in the power sector. The good thing about the IPO is that unlike many start up companies, JSW Energy is an established player with about 995 mw of operational capacity and generating revenues and profits, which have been on an uptrend for the last three fiscals. Even on the operating performance front, its power plants have been running at over 95 per cent plant load factor (PLF) or capacity utilisation.

That apart, the company is generating positive cash flow as well. The company reported revenues of Rs 1,852 crore (including Rs 577 crore from power trading) and net profits of Rs 277 crore in 2008-09. Notably, these numbers do not include the full impact of the recently added capacities equivalent to 300 mw in July 2009 and another 300 mw in September 2009. Taking this into account, the company's revenues in 2009-10 itself should be in the range of about Rs 1,800 crore and net profits at about Rs 650 crore.

Aiming higher

The company is aiming to scale up its capacities to 11,390 mw by 2015. Of this, about 3,140 mw is under advanced stages of implementation and is expected to be commissioned by April 2011. This is also a reason that its revenue will get a boost starting the next fiscal; the company will be commissioning its 945 mw power plant based in Barmer, Rajasthan (by December 2009) and 1,200 mw power plant based in Ratnagiri, Maharashtra (by April 2011). However, for the rest of the planed capacities of about 7,740 mw, these are at still in different development stages.
 

PEER COMPARISION
Company	CMP  (Rs)	Market cap (Rs cr)	Price/BV 2009	Capacity (MW)

Mkt cap(Rs cr)/
MW by 2012 Existingby 2012 NTPC 209172,4543.0030,00040,0004.31 Reliance Power 15736,4077.0003,000** 12.14 Tata Power 1,30330,1273.102,9758,0353.75 Adani Power 10121,5824.103306,6003.27 India Bulls Power 336,5961.5002,6552.48 JSW Energy @10016,0753.099953,1405.12 JSW Energy @11518,4864.209953,1405.89 Source: RHP, Bloomberg, Sharekhan Research  * Post issue  
**On account of expected delay in some of its power projects

Integration strategy

Besides the huge capacity expansion plans, JSW Energy’s strategy to create an integrated business model should augur well in the long run. The company has signed a joint venture with Toshiba for manufacturing power equipments. It has also formed a venture with Maharashtra State Electricity Transmission Company to build, own and operate a 169-km transmission network. On the fuel supply side, while the company has already entered into agreements for 3,380 mw for its ongoing projects, it is also eyeing captive mines in India and abroad for future projects.

Some concerns

Of its ongoing projects, its 2,060 mw will be fuelled by imported coal, for which it has tied up with companies like JSW Natural Resources (Mozambique) and Indonesia-based PT Sangai Belati. The imported coal will be purchased from these companies at a rate which is linked to the RB Index (a global coal index). The concern arises from the possible volatility in international coal prices, which could have an impact on the company's performance.

The company, however, believes that any increase or decrease in the international coal prices will be passed on to the customers wherein the long-term power purchase agreements (PPAs) are signed at pre-determined RoE (return on equity), which range from 16-20 per cent. In case of higher utilisation, the RoE might range between 20-23 per cent. This would hold true for fixed tariff (RoE) based generation capacity.

However, since the company is targeting to sell about 45-50 per cent of its total power generated through merchant power sales, it is exposed to the vagaries of coal price fluctuations. Merchant tariffs, which are currently hovering at about Rs 5-6 per unit, are determined by the market forces. So far, the tariffs are high due to power deficit in the country, which might be the case for some more years. But, in case tariffs decline or international coal prices rise it could reflect on the company’s RoE and earnings.
 

ONGOING PROJECTS
Project	JSWERL	RWPL(I)	RWPL(II)	JSWEL(Kutehr)
Capacity (mw)	1,200	1,080	270	240
Status	Under construction	135 mw operational; rest under construction	Under implementation	Under implementation
Procurement	Major orders placed	Majors orders placed	BTG order placed	In progress
Location	Maharashtra	Rajasthan	Rajasthan	HP
Commissioning	Apr-11	Apr-11	Jan-13	Dec-15
Power offtake	Short & long term (12-25 yrs)	Long term (30 yrs)	Short term	Short term
Fuel supply	Imported coal PT Sungai  Indonesia;  till 2030-34	Lignite, 30 years from COD. With BLMCL	“BLMCL and  PT Sungai.  Coal supply till 2034”	N.A.
Source : Company RHP

Outlook

There are not many concerns in case of this IPO. On the other hand, its operational capacities, revenue track record, execution capabilities, good management team, fuel linkages and financial closure of its major projects are encouraging. However, most