Indomitable optimism of JSW Energy investors

JSW Energy getting shortlisted for a PPA lifted the shares 13.49%. But investors are overlooking the fact that the economic value the contract will depend a lot on fine print


Photo: Mint
Photo: Mint

Shares of JSW Energy Ltd surged 13.49% on BSE on Wednesday on reports that the company is shortlisted to supply electricity to a Karnataka utility through a power purchase agreement (PPA). In a filing to BSE, the firm clarified that the bid requires several approvals for it to be finally clinched.

The caution did little to quell investor optimism. Why? JSW Energy has one of the highest shares of short-term (less than a year) electricity sales among the listed power utilities. Last fiscal year, 47% of its sales came from short-term contracts. The PPA, if it fructifies, will cut this share.

The bid involves the 860 megawatts Vijayanagar power plant in Karnataka, which right now is operating on short-term power contracts. Thanks to the plant’s location advantage—situated in high power deficit southern India—JSW Energy had managed to get sufficient buyers, and that too at a good price, till now.

But as transmission congestion in the region eased and stranded gas capacities came back on stream, short-term or merchant power prices began to fall. This impacted JSW Energy’s realizations, which fell 8% in 2014-15 and 3% in the last fiscal year. With merchant power rates remaining depressed and the Union government encouraging state utilities to purchase short-term electricity contracts through competitive bidding or reverse auction system, the firm’s realizations are expected to remain under pressure. The concerns have made analysts cautious, with some even paring their earnings estimates for the current and next fiscal years.

So the report about JSW Energy getting shortlisted for a PPA came as a big relief. Even better is the bid price that is doing the rounds. As speculated if the company signs the deal at a tariff of about Rs.4 per unit, then the project will earn very good returns (return on equity estimated at around 20%). Also, if clinched, the PPA will ease concerns about earnings stability, which in turn can aid JSW Energy’s inorganic growth strategy.

But all is not a given. One is the tariff. Second is the duration of the contract. Third, how are fuel costs going to be treated—will they have a pass-through clause? The Vijayanagar power plant operates on imported coal. So while prospects look encouraging, the economic value of the contract will depend a lot on the fine print. JSW Energy investors are overlooking this.

The writer does not own shares in the above-mentioned companies.

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