JSW Energy has cut a good deal with Jindal Steel
JSW Energy has agreed to acquire a 1,000MW thermal power plant from Jindal Steel and Power for Rs4,000 crore. To set up a project of similar size will cost Rs6.5 crore per MW
Latest News »
JSW Energy Ltd has cut a good deal with Jindal Steel and Power Ltd (JSPL). It has agreed to acquire a 1,000 megawatt (MW) thermal power plant from the latter for Rs.4,000 crore, valuing it at Rs.4 crore per MW. To set up a project of similar size will cost Rs.6.5 crore per MW. The purchase price will rise to Rs.6,500 crore if the seller manages to secure fuel supplies and find a long-term buyer for the electricity it produces by June 2018. Currently, the plant does not have either.
With the nation’s largest coal producer Coal India Ltd struggling to find enough customers, securing fuel supplies should not be a problem. Also, the plant is located in the coal belt (Chhattisgarh), so domestic coal can be ferried easily.
What will be a challenge, however, is finding a long-term customer. According to Girishkumar Kadam, vice-president at Icra Ltd, power distribution companies are not going in for long-term power purchase agreements, or PPAs. “We have not seen PPAs come in a big way. The process has been slow,” Girishkumar says.
If the plant is unable to find long-term buyers, it will have to depend on merchant power markets, the outlook for which is not encouraging right now. Utilization levels at the plant in question have fallen from 96% in 2014-15 to 58% in the first nine months of 2015-16. Prices on the Indian Energy Exchange remained below Rs.3 per unit last month. JSW Energy itself has guided for softening merchant power realizations in the current fiscal year.
Hence the importance of a PPA. Long-term contracts ensure the asset generates the stipulated return in a certain time frame which will optimize returns for equity investors (JSW Energy in this case). So even if the purchase price is bumped up by 62%, or Rs.2,500 crore, the plant still makes economic sense, JSW Energy says.
In the event the conditions are not met, the purchase price will be significantly lower, which according to an analyst will compensate for low realizations. In any case the deal has been given a good two years to fructify and valuations can change.
The immediate advance JSW Energy has to pay is only Rs.500 crore. Even if JSW Energy fully finances the purchase (assuming the price of Rs.4,000 crore) through debt, the net debt-equity ratio is estimated to rise from 1.8 times to a manageable 2.2 times.
So the immediate financial impact is negligible for JSW Energy. For JSPL, the sale proceeds can take a long time to materialize. Hence the sober reaction from investors—shares of JSW Energy closed flat while those of JSPL were down 3.5% on Wednesday.
The writer does not own shares in the above-mentioned companies.