GMR Kamalanga power unit a value accretive acquisition for JSW Energy

Analysts see development as favourable as valuations seem reasonable, JSW Energy's robust debt-equity ratio remains intact and gains are expected to accrue from day one

JSW Energy’s share purchase agreement to acquire GMR Kamalanga Energy — which owns and operates a 1,050-Mw coal-fired power plant — enthused the Street.

The acquisition is in the right direction as it puts JSW Energy’s robust balance sheet and cash flows to better use, and gains are expected to accrue from the first day. Valuations appear reasonable too, and the deal does not change JSW Energy’s debt-equity ratio, which remains at less than 1x.

The acquisition of three units of 350 Mw each is valued at an enterprise value (EV) of Rs 5,321 crore, implying an EV per Mw of Rs 5.1 crore. Analysts feel this is in line with expectations.

Since the plant is located near the coal belt in Odisha with dedicated rail transportation and easy access to water supply, variable costs are low. Analysts peg the same at Rs 1.5-1.6 per Kwh. Another positive is that 84 per cent of the capacities are tied up under long-term power purchase agreements (PPA) of 25 years, for which coal linkages of 3.64 million tonnes per annum are in place. The PPAs are with the Odisha, Bihar, and Haryana governments, while 170 Mw is available for merchant power sales, which could further improve financials.

“Most of the fixed cost gets recovered in the PPAs, while merchant capacity operates at a variable cost of Rs 1.5-1.6 per Kwh. Hence, even at low merchant realisation of Rs 2.5 per kWh, the plant can earn contribution of Rs 1 per kWh,” note analysts at JM Financial.

Gains, though, depend on JSW’s execution. The earlier owner was unable to buy coal and run the untied capacity (170 Mw), due to working capital crunch. JSW believes it can easily utilise this capacity for merchant sales. With the plant load factor rising to 90 per cent (from 75 per cent), JSW expects an Ebitda of Rs 900 crore for FY21, led by contribution from open merchant capacity (Rs 125 crore). GMR Kamalanga had reported revenue of Rs 2,195 crore in FY19.

Most analysts remain positive and see the development as favourable. Analysts at Motilal Oswal Financial Services have raised FY21 and FY22 earnings estimates by 15 and 8 per cent, respectively, to factor in the acquisition.

On the acquisition, Swarnim Maheshwari and Ashutosh Mehta of Edelweiss Securities estimate a payback period of five years and a 200-basis-point accretion to JSW Energy’s return on equity. “We envisage a re-rating potential with the missing link — inorganic growth — now in place,” they note.