FY21/22e EPS up 15/8% to factor in gains from acquisition of GMR plant in Odisha; upgraded to ‘Buy’ with TP of Rs 78
JSW Energy (JSWE) has signed a share purchase agreement to acquire GMR Kamalanga (1,050MW). The deal is valued at a maximum amount of Rs 53 bn (implying an EV of Rs 51 m/MW). We see the transaction as being value accretive for JSWE, given the strategic location of the plant, room for merchant volumes, and the company’s ability to reduce interest and O&M costs post acquisition. Moreover, the move lends visibility to JSWE’s capital deployment. We raise our FY21/22 EPS estimates by 15/8% to account for the takeover of Kamalanga from FY21. Upgrade to Buy with a TP of Rs 78/sh (23% upside).
GMR Kamalanga – asset strategically located near coal belt: GMR Kamalanga (3x 350MW) is strategically located in Orissa near the coal belt region. Accordingly, variable costs are low at just Rs 1.5-1.6/kWh. In terms of PPA, 84% of the plant’s capacity is tied up under long-term agreements (25 years) with Odisha (263MW), Haryana (334MW) and Bihar (283MW). The balance 170MW is available for sale/merchant. Given the strategic location of the plant, fuel supply linkages are tied for the entire PPA. Besides, the company has recently secured another 0.4mtpa for part of its balance merchant capacity.
Mgmt expects Ebitda of Rs 9 bn in FY21: JSWE expects Ebitda of Rs 9 bn for FY21, led by contribution from open merchant capacity (Rs 1.25 bn). The company noted that given the working capital crunch at the plant, the asset was unable to buy coal/run the untied capacity. Upon takeover, JSWE believes it can easily utilise this capacity for merchant sales. Further, with tie-ups under Shakti, a favourable position under Pilot Scheme-II (150MW) and efficiency gains on O&M post takeover, Ebitda can potentially rise to Rs 10.5 bn. The transaction value of Rs 53 bn includes contingent payable of Rs 6.15 bn. According to JSWE, this largely relates to dispute with one contractor. On a conservative basis, JSWE has included the entire amount as consideration for the deal.
Kamalanga to be value accretive: Given the strategic location of the plant, scope to improve efficiencies and headroom through merchant volumes, we expect the deal to be value accretive (expect IRRs of ~17-18% at debt: equity of 80:20). Balance sheet would remain under check (FY21e net debt: equity of 1.1x) and provide room for acquiring new assets as well (the co. is in discussion for acquiring Ind Barath Utkal – 700MW). Final approvals would come in place soon and JSWE is hopeful of completing the transaction by the end of the year.