Power-packed diversification for RPower through JP deal

While the company gets earnings-accretive assets, analysts are cautious, citing a lack of complete deal details

Investors gave the thumbs-up to the Reliance Power (RPower) and Jaypee Power Venture (JPVL) deal. The stocks of the two companies gained over three per cent each on Monday to close at Rs 94 and Rs 19.55, respectively-even JP Associates was up almost three per cent at Rs 61. Reliance CleanGen (RCL), the 100 per cent subsidiary of RPower, signed an exclusive memorandum of understanding with the Jaypee group to acquire the latter's 1,791 megawatts (Mw) of hydro-power generation assets. While the deal valuation has not been announced, analysts peg it between Rs 12,000 crore and Rs 15,000 crore and say the valuation is reasonable.

While some even peg the value of the assets at Rs 17,000 crore, others say, for 1,800 Mw of operational assets if RPower is paying Rs 12,000 crore, it leads to a per megawatt cost of Rs 6.7 crore, which is reasonable. Also, post the completion of deal, RPower will not only own cash generating assets, but it would also lead to portfolio diversification. Though RPower has hydro projects under development, it currently operates only thermal power generation assets, totalling, 4,525 Mw.

Say analysts at Kotak Institutional Equities, "We view the potential acquisition of operating hydro assets as favourable, assuming it is made at a reasonable price and as and when completed, will help RPower to diversify from its predominantly coal-based operational portfolio of 4,525 Mw."

Assuming the deal nitty-gritties don't throw up any surprises, the Street is positive. The deal would also be EPS-accretive from the start, say analysts. Kotak's analysts say a fair consideration for the three hydro assets would be about Rs 11,000 crore (assuming no other corporate debt is to be assumed) for a profit after tax contribution of Rs 1,000-1,200 crore. Thus, improvement in the earnings profile would be dramatic in the near-term, as earnings contribution from RPower currently is from 1,800 Mw of coal-based capacities only. For FY14, the company reported net profit of Rs 1,027 crore. Given the cash flow and its balance sheet strength funding the acquisition of a majority stake in JP's hydro assets should not be difficult.

However, since complete details of the transaction, valuations and timeline for deal completion are not known, analysts remain cautiously optimistic. There will be some challenges for RPower, too. The company is investing in assets in hydropower space which it has not operated till now. Also, since these hydropower assets are downstream and use river water flow to generate electricity, it will add to cyclicality in business operations. Further, analysts say RPower will also need to rope in investors for 49 per cent of stake as the company is likely to keep only 51 per cent stake in these hydropower assets, to be owned through its subsidiary.

For now, the consensus target price for RPower according to Bloomberg stands at Rs 79, lower than the current market price of Rs 94. Of the three analyst reports post the announcement of the deal, while one has a target price of Rs 118 the remaining two have target price of Rs 62 each.

JP Group stands to gain as well
For Jaypee Power Ventures Limited (JPVL), too, the news is positive. Very recently, the company had seen its deal with Taqa (the Abu Dhabi-based national energy company) for acquiring two hydro power assets (1,000-Mw Karcham Wangtoo and 300-Mw Baspa II) going awry. It now gets a new buyer in form of RPower without significant change in the deal value. What's more, JP Associates will see a substantial reduction in its debt. Analysts at Edelweiss Securities say, "As highlighted earlier, the hydro power project sale was a critical component of the company's asset monetisation drive. They valued the three assets at the total Enterprise Value of Rs 17,100 crore on EV/Ebitda basis (9x FY16 estimated Ebitda of Rs 1,910 crore)." They add, while the deal valuations are not known, it is a positive in terms of debt reduction of JP Associates consolidated net debt that stood at Rs 70,400 crore as of FY14 and Rs 64,700 estimated in FY15. They currently have a 'Buy' on JP Associates with the target price of Rs 93. On the flip side though, JPVL will also lose significant proportion of its operational capacities after selling 1,791 Mw of its 2,291 Mw capacity. While another 3,300 Mw of coal-based capacities are under construction, they are likely to be commissioned over the next two years. The consensus target price for JP Associates stands at Rs 80, as per analysts polled by Bloomberg during the month of July. For JPVL, the consensus target price stands at Rs 27 according to seven analyst polled by Bloomberg during July, wherein six have a Buy and one Hold rating on the stock.