SJVN, a hydroelectric power generation company, was originally established as a joint venture between the central government and the state government of Himachal Pradesh to develop and operate the project Nathpa Jhakri Hydro Power Station (NJHPS), on river Sutlej. According to Central Electricity Authority (CEA), NJHPS is currently the largest operational hydroelectric power generation facility in India with an aggregate generation capacity of 1,500 MW. For the nine months ended December 31, 2009, aggregate power generation at the NJHPS amounted to about 6,332 MU.

SJVN is coming out with an IPO as part of the government?s divestment programme. A mini-ratna category one PSU, the company will issue 41.5 crore shares in a price band of between Rs 23 and Rs 26, with a 5% discount for retail investors and employees. It also plans to raise about Rs 1,000 crore from the issue.

Expansion: SJVN is scaling up its operations by adding installed power capacity of 3,588 MW while another 412 MW is under construction. The company has bagged projects outside India in Bhutan and Nepal

Financials: For the years ended March 31, 2008 and 2009, the company has clocked total revenues of Rs 1,462 crore and Rs 1,634 crore, respectively, and profit after tax of Rs 717 crore and Rs 759 crore, respectively. Its PAT for the nine months ended December 31, 2009 is Rs 775 crore.

Positives : SJVN runs its operations efficiently as compared to its peers. SJVN?s installed capacity is one-third that of its peer NHPC but its turnover is about 75% that of NHPC. Its net profit margins are 46.5% compared to 39.5% for NHPC. Even its RoE, which has been in the 12-12.5% range for the three year period FY07-09, is double that of NHPC.

SJVN has consistently exceeded the normative annual plant availability factor target of 85% required by CERC from 2007 to 2009. The average plant load factor for NJHPS is more than 50% compared with the all-India average of about 35%. This has substantially added to the company?s profits in the form of incentives. SJVN has cut down the number of days required for maintenance work from 55 days in the year ended March 31, 2007 to about 10 days currently.

What?s more, the company is cash rich. It has been able to generate strong cash flows from its NJHPS plant ? for the nine months ended December 31, 2009 it had cash and cash equivalents totaling Rs 1,487 crore. The company has less debt on its books ? long-term debt stands at around Rs 1,769 crore with the debt to equity ratio at 0.26. In addition, the management expects to generate Rs 400 crore of cash every year (after paying dividends), which could be partially used to fund capex or to prepay loans. The company has been able to secure loans for funding the Rampur Hydro Electric Project at rates of Libor plus 1% from the World Bank.

Concerns : NJHPS is not going to add any capacity till the end of FY13 and will add another 412 MW (Rampur Hydro Electric Project) only in 2013. That means that the company will not see any significant rise in its profits over the next three years.

Then, there are environmental concerns. High silt levels on the river Sutlej could raise maintenance costs. In the past, NJHPS was forced to shut down its operations for several days due to high silting. Flooding has also taken its toll at times. For instance, NJHPS had to stop operations for 44 days in 2005 because of flooding of its powerhouse facility.

SJVN is also required to supply 12% of its annual generation to Himachal Pradesh free of cost and may have to supply additional 1% to a state-established local area development fund. The company intends to diversify into alternative energy projects, an area in which it has no prior experience. Besides, NJHPS is SJVN?s only hydroelectric power project in operation.

Valuations: Post-issue, the company will be valued at 11.7x its estimated FY10 earnings at the lower end of the price band and 13.2 times at the higher end. This is one of the lowest price-to-earnings ratios in the power generation industry. Even when compared to NHPC, SJVN is at a good discount in terms of P/E despite its relatively superior operations. Interestingly, though, in April 2010, the company had issued 2.7 crore preferential equity issue to the state government of Himachal Pradesh at a much lower price of about Rs 14.72 per share.

While the company is ramping up capacity, it will not see any substantial addition to profits till FY13. Investors will have to wait a while to see decent returns.

SJVN looks like a good defensive stock pick ? one on which you won?t lose your shirt on but is unlikely to get quick gains from either. It has consistently paid dividends to the government of India for the last five years, paying Rs 320 crore for FY09. With company operations running efficiently as well as profitably, those with a long-term horizon can add it to their portfolio at the lower end of the price band.