Acquisition of JP's power assets to boost JSW Energy's prospects

Acquisition to increase company's size and financials, but Street cautious

JSW Energy’s binding memorandum of understanding with Jaiprakash Power Ventures for acquiring its three operating plants with an aggregate capacity of 1,891 Mw bodes well for both the companies. It is also good news for Jaiprakash Associates (JP, owns over 60 stake in Jaiprakash Power), which has been carrying high debt and looking to monetise assets for long. Not surprisingly, JP group stocks were up five to nine per cent.

For JSW Energy, it gets sizeable and operational assets minus the waiting period that takes to construct such assets. Analysts at Edelweiss say that given Rs 12,000-15,000 crore cash on JSW’s books and no near-term growth plans, the JP deal gives JSW an opportunity to buy growth.

However, while awaiting clarity on deal valuations, market participants are cautious as there is doubt whether the deal will take place at all, given that JP has seen two asset-sale deals getting cancelled in a span of a few months. JP’s first deal to sell the hydro-power assets to TAQA (Abu Dhabi National Energy Company) was called off as the latter changed its business strategy. Though another deal was announced immediately in July-end with Reliance Power, which was willing to acquire JP’s 1,791 Mw of hydro assets for around Rs 12,300 crore, it was called off with Reliance Power siting regulatory uncertainties and tariff issues. Not surprisingly, JSW Energy’s stock closed only marginally up at Rs 72.50.

While a positive outcome will be welcome provided valuations are reasonable, this week JSW Energy also received environmental approval for its lignite mine expansions in Rajasthan. The company’s Kapurdi mine will see annual output double to seven million tonnes for four years, and help bridge the shortfall in lignite availability thereby boosting power output. Its Jalipa mine (under development and expected to be commissioned in another two years) will also see substantial ramp-up even before additional mining approval at Kapurdi expires.

Analysts have been looking forward to environmental clearances for its mining expansion and acquisitions. But, there are some factors that the street is watchful including power tariffs and PPA (power purchase agreement) for existing power capacities.

Analysts at JM Financial, post this environmental clearances, have put a ‘Buy’ rating on the stock and say that incremental triggers of tariff approval at Barmer (1,080 Mw), signing of PPAs and potential acquisition can lead to re-rating of JSW Energy. They say that JSW plans shifting to competitively bid PPAs from current merchant-heavy model for both Ratnagiri (600 Mw untied) and Vijaynagar (860 Mw untied) plants. While the move will provide stability and visibility to cash flows, PPA rates may be lower than near-term merchant realisations and hence, there could be some pressure on topline during the transition period.