JSW Energy: Monnet deal raises concerns

Though acquisition-led strategy is positive, looking at the subdued demand and increasing debt, analysts sound cautious

JSW Energy’s appetite for acquisition-led growth seems enormous. On Thursday, JSW signed a memorandum of understanding (MoU) to buy the under-construction power plant of Monnet Group, the final decision of which will be taken after due-diligence. The inorganic growth strategy is positive, looking at the time and effort required for setting of new capacities, and ensuring fuel linkages and tie-ups for sale of output.

JSW’s move to acquire Monnet Ispat’s 1,050 Mw of thermal capacity is a step in the right direction, assuming it does not pay a significant premium over the project’s cost. While the sale agreement for part of the output is in place, Monnet had recently won a coal block for ensuring supplies. The project, estimated to cost Rs 7,100 crore, is likely to be commissioned in the next 18 months.

 

However, the Street is concerned about the likely rise in JSW’s leverage. IT remains one of the most de-leveraged companies in the sector and had done well in FY15, curtailing working capital requirements and incurring limited capex of Rs 700 crore. Led by ramp-up at Barmer (Rajasthan), JSW’s adjusted profits jumped 31 per cent, whereas its net debt also reduced.

However, soon it is also likely to complete the Rs 9,700-crore transaction for the MoU signed in September 2014 with Jaiprakash Power Ventures. The deal to acquire the latter’s 1,891-Mw power assets will lead to an increase in JSW’s debt. The good part is that these projects are operational and thus, will be cash-flow-accretive from the start.

While JSW also had cash and investments of Rs 1,750 crore at end-FY15, much of it will be used for acquisition of JP’s power assets. For the Monnet deal, it is likely JSW will have to issue fresh equity leading to some dilution. Analysts at Kotak Institutional Equities say an all-debt funded acquisition will likely raise net debt to Rs 24,300 crore (from Rs 7,500 crore in FY15) with the net debt-equity ratio rising to 3x on current net worth (from 1x in FY15). Since JSW’s management has proposed a resolution that allows for equity issuance of up to Rs 7,500 crore, it could lead to up to 28 per cent dilution given the amount. Cashflow from operations, however, has been rising and stood at Rs 3,400 crore in FY15, and provides some comfort.

 

Further, there are questions on the timing as well, given that the industry has ample capacity lying idle and realisations are under stress. While the demand remains muted, further pressure on realisations is likely to come with integration of the southern grid. Analysts at Ambit say their key thesis for FY15 was realisations coming under pressure on the back of South India integration. However, the   process was delayed and now with strong visibility of this happening in FY16, the management has already cautioned on increased pressure on average realisations.

While the latest move is positive from a long-term perspective, the Street is looking at the near term. The stock fell 2.2 per cent, to close at Rs 97 on Friday.