JSW Energy: Increasing debt is a key concern

Inorganic growth is a good strategy, but it could also push up debt

JSW Energy continues with its acquisition-led strategy to add capacities. On Tuesday, it announced signing of a binding memorandum of understanding (MoU) to acquire Jaiprakash Power Venture’s 100 per cent stake in 500 Mw Bina Thermal Power. The valuation of the deal is yet to be announced but the acquisition cost should be in excess of Rs 2,000 crore. JSW also announced the completion of acquisition of 300 Mw Baspa II hydro-electric and 1,091 Mw Karcham Wangtoo hydro-electric projects in Himachal Pradesh, the MoU for which was signed last year.

The completion of the acquisition marks the company’s foray into hydro power and will give impetus to its plans of constructing another 240 Mw of hydro power capacity. Overall, these deals will take JSW Energy’s generation capacity to 5,000 Mw.

The latest deal comes a few days after JSW Energy announced an MoU to acquire Monnet Ispat’s 1,050 Mw thermal capacity, which is to be commissioned in 15-18 months.

The inorganic growth strategy is positive, given the time and effort required to set up new capacities. The acquired hydropower assets have power purchase agreements in place, which will drive revenue growth from day one.

Existing operations are also doing well. JSW Energy results for the June 2015 quarter were better than expectations thanks to stabilisation of Rajasthan West and Ratnagiri plants.

Business environment for power producers remains challenging with subdued demand putting pressure on realisations. The integration of Southern grid will dampen realisations.

For JSW Energy, the acquisitions could lead to stress coming back on the balance sheet. The two hydro power projects have been acquired for an asset value of Rs 9,275 crore. JSW will also pay Rs 300 crore after receiving certain consents and approvals related to Karcham Wangtoo project. With total debt touching close to Rs 15,000 crore, JSW’s debt-equity ratio will rise to two times. The company had reduced the ratio to 1.38 times in FY15 from 1.6-1.7 levels seen in preceding years. The other acquisitions that are yet to be concluded will only add to debt.

Thus, despite better operating margins, increasing depreciation and interest costs might keep net profit growth under check. Analysts at Motilal Oswal pegs a net profit growth of only three per cent for FY16.

The Bloomberg consensus target price since August stands at Rs 90. The stock gained 9.6 per cent to close at Rs 74.25 after the deal was announced on Tuesday. It will be interesting to see if sentiments can sustain.