Jaiprakash Power: Limited earnings upside in the near term

Jaiprakash Power: Limited earnings upside in the near term
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First Published: Thu, Jan 14 2010. 10 52 PM IST

Updated: Thu, Jan 14 2010. 10 52 PM IST
The recently amalgamated and renamed power company, Jaiprakash Power Ventures Ltd (JPVL), registered a flat net profit for the quarter ended December despite a 92% increase in income from operations.
The company posted total revenues of around Rs119 crore for the three months compared with Rs62 crore in the year-ago period. Operating profit was higher by 81% at Rs102 crore, while higher interest costs kept profit after tax of Rs24 crore, at the same level as a year ago.
The presence of extraordinary items has made comparison difficult. During December, JPVL incurred a loss of around Rs7 crore due to foreign exchange variations of the amalgamated company. However, during December 2008, it made an extraordinary profit of Rs20 crore, thanks to the refund of interest from Power Finance Corp. Ltd (PFC) for earlier years. Hence, profit for December quarter at Rs16 crore was around 62% lower than the year-ago period.
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However, a comparison of the third quarter results for fiscal year to 31 March with that of other periods will not be accurate in establishing its performance, as it was recently merged with another company from the group, Jaiprakash Hydro Power Ltd. Three shares of Jaiprakash Hydro were given for every share of the original JVPL, the wholly owned subsidiary of Jaiprakash Associates.
One positive outcome of the merger is that it will bring a healthy portfolio of hydro and thermal power projects. The hydropower generation of the merged entity will be around 700MW after the merger from 300MW operated by Jaiprakash Hydro. In the next 15-18 months, the merger is expected to add another 1,000MW of power to its assets. The company is talking of an addition of 12,770MW of capacity over the next nine years, which, of course, is too long a trajectory to consider from an investment perspective.
JPVL would have a steady revenue stream from its operational projects where it realizes better returns from sale of merchant power than the regulated returns. However, in the near-term one may not see any significant earnings accretion due to the high gestation period for hydropower projects, which may have a negative impact on return on equity. The fledgling company is still tying up coal linkages for some of its planned thermal projects.
Analysts are also expecting an equity dilution as the company will have to garner funds for its projects. Its short-term requirements are funded mainly through discounting its future receivables. In fact, in 2008, JVPL’s plan to tap capital markets was stalled due to poor market conditions. Reports now say that a sale of shares worth Rs1,500 crore to institutional buyers, implying a dilution of about 10%, will bridge part of the gap between its ambitious plans and poor internal funding abilities.
Such concerns will limit any upside in the stock in the near to medium term, especially given that there are a host of large power sector plays with strong earnings growth potential. JVPL share price has corrected a bit after the results, although it has outperformed the Nifty index on the National Stock Exchange like its peers.
Graphics by Naveen Kumar Saini/Mint
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First Published: Thu, Jan 14 2010. 10 52 PM IST