JSW Energy gets ‘Buy’ rating from Nomura courtesy Bina Power acquisition

By: | Published: July 25, 2016 6:06 AM

As per releases issued by JSW Energy (JSW) and Jaiprakash Power Ventures (JPVL IN, Not Rated) on July 18, the two companies have executed definitive agreements whereby JSW will acquire a 100% stake in Bina Power Supply Ltd (BPSL)

Earnings before interest, taxes, depreciation and amortization (EBITDA) margins, for the June quarter, increased to 45%, 800 basis points over Q1FY16, helped by long-term power purchase agreements (PPAs). (Reuters)The two units of the Bina project were commissioned on 31 Aug 2012 and 7 Apr 2013. (Reuters)

As per releases issued by JSW Energy (JSW) and Jaiprakash Power Ventures (JPVL IN, Not Rated) on July 18, the two companies have executed definitive agreements whereby JSW will acquire a 100% stake in Bina Power Supply Ltd (BPSL), which will house the 2x250MW Bina coalfired project (JPVL’s board has approved the hive-off and transfer of its Bina project into BPSL). The all-cash deal is pegged to a base enterprise value of BSPL at Rs 27 bn (as on 1 Sep 2015), subject to mutually agreed adjustments. The transaction is subject to approvals from the shareholders of JSW and JPVL, the Competition Commission of India, the Government of Madhya Pradesh, the Madhya Pradesh High Court and National Law Tribunal.

The long stop date of the deal is 31 May 2017, but it is mutually extendable. The two units of the Bina project were commissioned on 31 Aug 2012 and 7 Apr 2013. Revenues of the project in FY14/FY15/FY16 were Rs8.4 bn/Rs12.3 bn/Rs9 bn, respectively. As per JSW, the transaction is structured to be value-accretive for its shareholders immediately upon consummation. Separately, the JSW Board has approved the acquisition of 100% equity in Minerals & Energy Swaziland (MESL, Not Listed) for a price not exceeding $1.5m. MESL has a prospecting licence for coal over 8,000 hectares of coal-bearing area in Swaziland. The all-cash deal is expected to be concluded by 30 Sep 2016. MESL commenced project activities in October 2015; there are no revenues so far.

graph-3JPVL’s FY15 annual report and previous investors’ presentations indicate: 70% of the offtake (including 5% at variable cost) from the project is tied up under a 25-year long-term Power Purchase Agreement (PPA) with MP Discoms on a regulated return basis, and balance capacity is open-ended; Project cost = Rs35.8bn (R22.6 bn debt + Rs13.2 bn equity); Project debt (Rs22.6 bn) to be repaid in quarterly instalments starting January 2014 with repayment to end in March 2023.

As per a 3 June 2016 true-up order by the Madhya Pradesh Electricity Regulator (MPERC), the approved capital cost for the project for its long-term PPA with MP Discoms was Rs34.8 bn as of March 2015 (Rs10.5 bn normative equity + Rs20.7 bn normative debt). Notably, JPVL had petitioned for approving Rs36 bn as the final project cost.

Operating stats for Bina: The plant operated at a PLF (plant load factor) of 55% in FY15 (availability was 92.5%) and 30% in FY16. The plant is idling so far in FY17 on account of low schedule, as per the Central Electricity Authority (CEA). Deal not a surprise; but indicative EV below expected range: In our view, Bina’s acquisition is not a surprise, as JSW-JPVL have been in discussions on this asset since November 2014 and a binding MoU to acquire the project was inked on 8 September 2015 (the Rs27 bn base EV for the Bina project seems to be pegged to this date accordingly). Going by news reports in September 2015 (Livemint, Business Standard), the Rs27 bn EV is below the expected range.

At just below 1x book, it is a reasonably attractive deal for JSW: We understand that project debt for Bina stood at Rs18 bn as of FY16. Accordingly, while the Rs27 bn EV is subject to adjustments, it seems that JSW would pay less than 1x of the equity invested by JPVL in the project, which we believe is reasonably attractive from JSW’s perspective.

Post-transaction net-debt to equity unlikely to exceed FY16 level (1.8x), well below management’s target ceiling of 2.5x; equity infusion not required: JSW’s net-debt to equity was 1.8x as of FY16; our FY17F/18F net-debt to equity is 1.4x and 1.1x respectively. If we were to assume that the BPSL buyout is entirely debt-funded and the deal is concluded by March 2017, ceteris paribus, JSW’s FY17F net-debt to equity would rise to 1.7x, still below the FY16 level and well below the 2.5x ceiling indicated by the management. Accordingly, we do not see JSW requiring any equity infusion in the context of this deal.
BPSL buyout would not impede Tamnar-I acquisition in FY19: In the context of JSW’s agreement to acquire the 4×250 MW Tamnar-I coal-fired project of Jindal Steel & Power for an EV of Rs40-65 bn by 30 June 2018, we do not see BPSL’s buyout as an impediment to closing the deal. Our ball-park calculations suggest that if we assume (i) Tamnar-I costs Rs65 bn (ceiling level) and is entirely funded by debt taken towards the end of FY18F, (ii) BPSL’s Rs27 bn acquisition is entirely debt-funded as well and BPSL breaks even in FY18 (vs management’s expectation of the deal being earnings-accretive upon conclusion of the deal itself), JSW’s FY18F net debt/equity would rise to 2x, well within the ceiling of 2.5x.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition