JSW Energy reported its highest single-day gain on the BSE on Monday after the company announced purchase of two Himachal-based hydro-power plants from Jaiprakash Power Ventures for an enterprise value of R9,700 crore, nearly seven weeks after signing an MoU in this regard.
After rallying as high as 13.4% to Rs 86 intra day, the JSW Energy scrip closed at R85.05, up R9.20, or 12.1%. Jaiprakash Power Ventures (JPVL) also rallied close to 6% before ending the session at R14.76, up 2.71%. Jaiprakash Associates, the holding company of JPVL, fell 2.6% to R33.65.
While an MoU on the deal, which also included the sale of 500 MW of Bina, was signed in late September, valuation details were not available then.
Under the latest arrangement, the board of JPVL approved a transfer of its 300-MW Baspa-II and 1,091-MW Karcham Wangtoo hydro-electric projects into a separate company called Himachal Baspa Power Company. Subsequent to this, JSW Energy will acquire 100% stake of the resulting company by paying the equity consideration in cash.\
While the method through which JSW Energy plans to fund the deal was not announced as of Monday, the Street seems to have acknowledged that the acquisition will turn the company into the largest hydroelectric power producer in the country with an operating portfolio of
1,300 MW.
According to JSW Energy, the acquisition was a strategic fit to the company since it was also setting up its own 2,450-MW hydro project in the state. “This is an attractive deal for our shareholders, as it is expected to be earnings accretive on closure,” JSW Energy’s chairman Sajjan Jindal said in a press release.
However, initial reactions from analysts voiced concern on the value provided by these projects, especially if the company considers equity dilution for funding the deal.
As per Ambit Capital, the acquisition is not value-accretive as it believes that a wholly debt-funded purchase will only add 0.5% to the expected fair value of the stock (R65) while an equity dilution would bring it down 1.8% to R63.8.
The brokerage argues that although the acquisition would improve the power-purchase agreement (PPA) share in the overall portfolio, value accretion beyond the purchase price is unlikely due to peak return-on-equity ratios (RoEs) and uncertain carbon credit hand-outs. It expects the Baspa-II and Karcham plants to report RoEs of 31% and 16% in fiscal 2015-16.
Meanwhile, trading interest in JPVL stocks is likely to show an upward bias given that the deal is likely to bring a much-needed improvement in the balance sheet of the company as its management in the past has clearly said that the proceeds will be used to pay off debt.
As per Bloomberg, while the standalone net debt of JPVL stood at R17,496 crore as of September 2014, the consolidated debt of the company was R26,272 crore as of March 2014.