JP Power: Asset sale to bring down debt/equity ratio to 2.6x

Analysts not raising earnings estimates despite commissioning of new capacity and inflows from asset sale

Shares of Jaiprakash Power Ventures did not react sharply on Monday, after the sale of two of its hydro electric power projects to JSW Energy for Rs 9,700 crore was formally announced. The transaction will give the cash-strapped JP Power the much-needed funds to lower its debt and re-bid for the coal mines that were de-allocated earlier by the Supreme Court. The company also needs Rs 5,000 crore to fund existing projects over FY15-16. After the sale of two assets, the promoters of Jaiprakash Power Ventures can bring down their debt/equity ratio to manageable level of 2.7x from the present 4x, but analysts are not looking at any earnings upgrade.

During the course of the financial year, interest costs for JP Power have shot up. HDFC Securities says the company has been meeting its equity and debt obligations through expensive loans in an after-results note dated November 11. JP Power's interest cost in the September quarter shot up to Rs 476 crore from Rs 390 crore in the June one. In the corresponding quarter of FY14, JP Power's interest outflow was Rs 357 crore. With the sale of the two power plants, JP Power Ventures can bring down its debt/equity ratio from 4x to 2.6-2.7x, which is a positive, claim analysts.

  The Street believes that the deal appears to be a good one prima facie and should substantially ease the financial pressure on the company. The two projects the company has sold to JSW Energy together have debt of Rs 2,500 and another Rs 1,600 crore of securitised debt, which is not project debt. Analysts believe JSW Energy has paid Rs 3,500-3,700 crore for an invested equity of Rs 2,500 crore, which is 1.4x or 1.5x of equity. Given that the projects enjoy 20 per cent return on equity, the valuation could have gone up to two times the equity investments of the promoters. Commenting on the deal, Rahul Modi, analyst at Antique Stock Broking, says: "The deal is positive for the sector as consolidation will help lower NPA risks and good assets will be acquired by stronger players. Also, the deal will help JP Power Ventures lower deb/equity ratio from 4x to 2.6x."

Also, the sale of these assets will give some leverage to the company to bid for the coal mines it has lost. Some analysts are not factoring in the asset sale in their earnings estimates. During the quarter the company commissioned unit-1 at Nigrie plant and this would result in higher losses for the company.

Emkay Global believes that with Nigrie in the commissioning phase, it is assuming lower PLF resulting in losses in FY15 for Nigrie plant. Hence, the brokerage has revised its FY15 earnings, and adjusted FY16 earnings accordingly. The brokerage does not expect significant change in its FY15/16/17 EPS estimates, given that the deal cash flow is likely to be used for parent debt repayment.