As the markets revive, big-ticket industry houses will be coming out with their initial public offerings. Of these is the JSW Energy (JSWE), promoted by Sajjan Jindal and family. The company, which intends to be in all critical areas of the power generation and distribution sector, plans to raise around Rs 2,700 crore from the issue. The price band has been kept at Rs 100-Rs 115 and will open for subscription between December 7 and 9.

The company has a decent track record in managing a power capacity of 995 mw. Analysts expect the company to clog revenues of around Rs1,800 crore and a net profit of Rs 600 crore for the current financial year. It plans to build another 2,415 mw of generating capacity over the next five years and a majority of the IPO proceeds would be used to fund these projects. It would also be getting into the distribution business and other related areas.

Considering the track record of the management and the potential that the power sector offers, the basic investment objective is on a sound footing. The fact that seven institutions have joined in as anchor investors that have to stay invested with the company for a longer period of time and contributed around Rs 465 crore, speaks in favour of the issue. The anchor investors include Eton Park International LLP, Valiant Mauritius, Deutsche Securities Mauritius, Credit Suisse Singapore and Reliance Capital Trustee, who would be paying Rs 110 per share.

A discount of Rs 5 to the issue price, to be determined pursuant to completion of the book building process, will also be offered to retail individual bidders. Given this, the reasoning for long-term investment is in place. However, for investors with a shorter view, analysts say that the pricing would be a tad expensive.

The background

JSWE forms a part of the Jindal South West (JSW) Group, headed by Sajjan Jindal. It intends to foray in all areas of power — generation, transmission, distribution and even trading. The company happens to be the first independent power producer (IPP) to be set up in Karnataka, with operating capacities of 860 mw.

Currently, it has 2, 790 mw of projects under implementation in Rajasthan, Himachal Pradesh and Maharashtra. Raj WestPower (RWPL) is a Rs 5,000-crore project at Bhadresh, in Barmer district. The project plans to generate 1,080 mw (8 x 135 MW) of power which will be supplied to the distribution companies (discoms) in Rajasthan.

In Maharashtra, there is a 1, 200 mw (4 x 300 mw) power project under implementation located at Jaigarh, in Ratnagiri district of Maharashtra. JSW envisages to make Jaigarh a port-based power plant by setting up a port facility and truning it into a full-fledged business centre in the coming years. JSWE is also setting up a hydro power project at Kutehar on Chamba river which will generate 240 mw of power.

The plans

The company has four projects under implementation which shall scale its capacity to 3,410 mw by the end of financial year 2013 This would be a 3.5 times increase over its existing operating capacity of 995 mw.

By raising around Rs 2,700 crore from the IPO, the post-issue holding will dilute from 91.6% to 77.8%, assuming the issue is closed at Rs 110 per share. This is also an encouraging factor as it indicates promoter confidence in the project as there is no significant dilution.

These funds will then be used to finance construction and development of power projects aggregating to capacities of 2790 mw, 400 kV transmission lines project and development of lignite mines at Barmer, Rajasthan. Around Rs 470 crore from the project will also be used to retire the high-cost debt of IDBI Bank which was taken to infuse capital into the ongoing projects.

JSWE has set around 1,635 mw of power capacity, which will be sold on short-term merchant basis. This way, the company would be able to take part in the spikes of the power rates. Currently, the average realisation of tariffs in the short-term markets is Rs 5.5 per unit, whereas the average fuel cost is around Rs 1.87 per unit, say analysts at Prabhudas Lilladhar. Now, this strategy would allow the company to gain from steady power supply contracts and also the spikes in the power trading business rates.

A t the moment, around 45% of fuel demand to be met by imports: JSWE has entered into an agreement with PT Sungai Belati coal, Indonesia and JSW Natural Resources, South Africa, for 45% of its coal requirements (aound 19 MTPA) by FY15. Further, the management is on the lookout for overseas coal mine acquisition over the next 6-9 months.

Valuations and concerns

The fact that JSWE is likely to sell 50% of the power generated via long-term power purchase agreements (PPA) to the state electricity boards (SEB) and the poor health of the SEBs could impact financials of the company are a big risk to earnings quality. But then this is the inherent risk associated with every power generation company.

In a similar vein, the company is yet to receive clearances for the 1,000 mw power project, which the company has an MoU with the Maharashtra government, and would be expanded to 1,200 mw. Also, for the additional 270 mw power project at Barmer, Rajasthan on the same parcel of land as RWPL?s 1,080 mw power project at that location.

Analysts at Prabhudas Lilladhar, a Mumbai-based stock brokerage reckon that with the buoyancy in short-term tariffs (around Rs 5.5 currently) and bulk of its initial capacity addition targeted at short-term sales, the company should deliver strong operational performance in financial year 2011 and 2012.

?However, at Rs110, JSWE is expected to be valued at 2.4 times its price to book value (P/BV) for financial year 2012, which in our view is stiffly priced. Also, enough paper is expected to hit the market in the power generation segment over the next 3-6 months, which shall further have an impact on the overall appetite for such issues,? says Nisha Biyani of Prabhudas Lilladhar in a report on the company. They recommend a ‘subscribe’ at the lower end of the price band for a probable 7-8% listing gain.

For long-term players, the belief in the management to deliver on execution plans and promises holds the key.