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JSW Energy IPO: Our View - Views on News from Equitymaster
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JSW Energy IPO: Our View
Dec 7, 2009

JSW Energy Ltd. (JSWEL) of the JSW Group of companies is coming out with its IPO. The issue opens today and will close on 9th December 2009. The company will be raising Rs 27 bn through this IPO. The IPO is priced within a range of Rs 100 to 115 per share. The company is offering Rs 5 discount on the offer price to retail investors. Here is a synopsis of our view on the issue. We shall soon put up a detailed report on this IPO. Company Background
Business: Incorporated in 1994, JSW Energy Ltd. (JSWEL) is an established power company with 995 megawatts (MW) of operational generating capacity. Further, 2,655 MW of generating capacity is in the construction or implementation phase. JSWEL has been in the power generation business since 2000. The company is also engaged in the power trading business. It has also entered into joint ventures (JVs) in mining, turbine and generator manufacturing and power transmission spaces.

Objects of the issue

  1. To part finance the construction and development of the 'identified projects' of 2,790 MW, 400 kV transmission project, and lignite mining venture – Rs 21.4 bn
  2. Repayment of corporate debt - Rs 4.7 bn

JSWEL's identified projects
Project Capacity Fuel Esti. Cost (Rs m) Amt. already deployed as of Oct. 1 2009 (Rs m) Amt. proposed to be infused from the IPO (Rs m) Amt. proposed to be financed through debt (Rs m)
Ratnagiri 1,200 MW Coal 45,000 27,866 4,189 33,750
Raj West Power Ltd. - Phase I 1,080 MW Lignite 50,000 40,399 2,877 37,500
Raj West Power Ltd. - Phase II 270 MW Lignite 13,500 618 2,757 10,125
Kutehr 240 MW Hydro 19,152 129 8,228 10,800
Jaigad Power Transco Ltd. 400 KV NA 5,800 2,193 496 4,350
BLMCL (Lignite Mining JV) 7 MTPA NA 7,105 3,193 2,878 3,270
Total     140,557 74,398 21,425 99,795

Reasons to apply
Prior operational experience: JSWEL has a reasonably good operational history to boast. This is unlike some other power companies that recently came out with their IPOs despite having no prior experience in operating large power projects. The company currently has around 995 MW of projects under operation. Out of this, 260 MW has been under operation since the past nine years. All its plants, including the newly set up 735 MW of capacities, operate at high plant availability ratios. These also have high capacity utilisation (measured by PLF or plant load factor). Experience of operating power plants is a big positive in favour of JSWEL as compared to its new peers in the industry.

* 1HFY10 data annualised for comparison purposes;
Data Source: JSWEL IPO prospectus

Good visibility for future projects: Arranging for funds is a big headache for power sector companies. But with financial closure already achieved for a large part (2,145 MW) of its future projects, JSWEL is in a comfortable position to execute them in time. The company has also obtained necessary construction approvals from respective state governments for these projects. It has already taken possession of land, and placed orders for all critical long-delivery orders for plant and equipment for the same.

Reasons not to apply
Execution risks: Like any other power generating company, the biggest risk to JSWEL’s future growth is execution. The company is in process of setting up projects totaling 7,740 MW, which is significantly more than the 995 MW that it has under operation currently. Power projects face a number of issues in their development and construction - like those related to regulatory and environmental approvals, land acquisitions, and fuel and equipment supplies. All these may result in cost overruns of the projects thereby impacting the company's cash flows in the future. Also, power projects require a long gestation period before positive cash flows can be generated. The time and costs required in completing a project may escalate due to many factors.

Concluding remarks
JSWEL has done well in the past in growing its sales and net profits at average annual rates of 50% and 33% respectively between FY06 and FY09. The company also has an operational history to its credit unlike some of the other power sector companies that have come out with their IPOs recently. Its existing 995 MW of operational generation capacity gives its earnings a good future visibility.

However, despite these positives, we see execution risks for the company as it expands its generation capacity over the next few years. The risks to investors are magnified by high valuations that the issue is priced at.

JSWEL's comparative analysis
(FY09 data) JSWEL NTPC Tata Power GIPCL NHPC
Generation capacity (MW)$ 995 30,644 2,905 560 5,175
Sales (Rs m) 18,350 419,237 175,051 11,550 32,374
Return on equity 18.7% 14.1% 14.1% 7.2% 6.8%
Valuations*          
Market price (As on 4th Dec. 2009) 110 210 1,360 118 32
Price to earnings (based on FY09 EPS) 33.3 21.2 23.2 20.9 32.6
Price to book value (based on FY09 book value) 4.1 3.0 3.5 1.5 1.8
Market capitalisation (Rs bn) 181 1,729 301 18 394
Market cap per MW (Rs m) 182 56 104 32 76
* Valuations and related data for JSWEL assumed at a higher offer price of Rs 110 per share (Rs 115 minus Rs 5 discount for retail investors)
, 1HFY10 annualised earnings, and post issue capital; $ For JSWEL, out of 995 MW of capacity,
735 MW was commissioned only recently and as such its full impact on profits is not yet seen;
Source: JSWEL IPO prospectus, Company reports, Equitymaster Research

On the basis of book value (taking into account the funds raised through the IPO), the issue is valued at 4.1 times, which is on the higher side as compared to its already listed peers. We do not see these valuations as comfortable and thereby advise you to AVOID applying to the IPO.

We shall soon put up a detailed report on this IPO.

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