Three years ago, JSW Energy’s market capitalization was a third that of Tata Power Co. Ltd and three-fifths that of Adani Power Ltd. Tata Power’s and Adani Power’s installed power generating capacities then were 2.7 times and 1.7 times bigger, respectively, than JSW Energy’s.
With its latest 500 megawatt (MW) power plant purchase, JSW Energy’s capacities have almost doubled from back then. Tracking the rise, the company’s market value has jumped 90% during the period to Rs.13,333 crore. Capacities at Tata Power and Adani Power also rose. But unlike JSW Energy, market caps of these companies fell in the range of 13-18%.
JSW Energy’s market cap is now greater than that of Adani Power, despite the latter having higher generation assets. Similarly, Tata Power market cap is now only 42% higher than JSW Energy. The changes reflect the hurdles these companies hit, while JSW Energy was lucky to avoid non-remunerative power purchase agreements (PPAs).
Also, acquisitions or capacity additions did not push JSW Energy to the brink financially. It reported annual profits in each of the last three fiscal years while Adani Power managed to avoid loss only in the previous year. In fact, JSW Energy is one of the few private firms to consistently generate double digit return ratios in recent years.
That was made possible by its strong merchant business. Due to its Karnataka plant’s location advantage, JSW Energy was able to clinch good short-term deals. This helped it generate steady cash flows, giving it ammunition for asset acquisition. “JSW turned FCF (free cash flow) positive in FY14 as it was able to spot stress in the sector early and pull out of organic growth at the right time. Thereafter, FCF has been growing despite pressure in the merchant market. This has helped JSW in making attractive acquisitions and allocating capital efficiently,” Motilal Oswal Securities Ltd said in a note.
Of course, merchant power tariffs are coming under pressure. But JSW Energy is managing to attain better tariffs by bidding for bilateral contracts. Also, to avoid offtake problems, the company is concentrating on buying operational assets with PPAs.
A substantial part of the hydro power assets it acquired earlier are tied up through PPAs. The latest deal to acquire a 500MW power plant also has a PPA (besides being bought at discount to project cost). The 1,000MW deal with Jindal Steel and Power Ltd does not have a PPA yet. But the acquisition will be done at significant discount to replacement cost if a PPA is not signed in stipulated time.
Nevertheless, the acquisitions will raise the share of PPAs in JSW Energy’s power business. With purchases being done at attractive prices and PPAs assured of steady returns, the management not only expects to fund current acquisitions without any balance sheet deterioration but also buy more in future.
While the company’s comfortable debt-to-equity ratio (less than two times now) may enable this, the challenge for JSW Energy is to optimize returns from the assets it is acquiring. The new assets do not have 100% PPAs and some like the latest acquisition are operating at sub-par levels due to low off-take. Also, they are in regions that have surplus power. It would be interesting to see how JSW Energy optimizes returns from them.
The writer does not own shares in the above-mentioned companies.