
JSW Energy’s O2 Power acquisition tells us buying is better than building assets

Summary
- Building new plants involves a gestation period. There are inordinate delays in land acquisition, regulatory clearances, arranging for power evacuation etc. O2 Power has everything in place and has already tied up for offtake of power. It has an attractive blended tariff rate of ₹3.37 per kwh.
JSW Energy Ltd has announced the acquisition of O2 Power Pooling, a company engaged in renewable power, for an enterprise value (EV) of ₹12,468 crore. While the total consideration is ₹15,154 crore, the net working capital is ₹2,686 crore largely made up of cash, thus resulting in a lower net EV. Additionally, ₹14,000 crore capital expenditure will be required to reach total capacity of 4.7GW, which means the total cost for the entire capacity works out to about ₹26,000 crore. Note that 4.7GW of capacity is split into three GW of solar and 1.7GW of wind—building this capacity would have come at the same cost, that is approximately ₹26,000 crore, as setting up solar power plants that cost ₹4 crore per MW, and ₹8 crore per MW for wind.
Even then, the acquisition is excellent for JSW Energy. Here’s why.
Building new plants involves a gestation period. There are inordinate delays in land acquisition, regulatory clearances, arranging for power evacuation (transmission connectivity) and most importantly, finding the right customer for power at an attractive price for a long duration. For JSW Energy, building new capacity would have meant uncertain timeline and a lack of revenue visibility.
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O2 Power has everything in place and it has already tied up for offtake of power. It has blended tariff rate of ₹3.37 per kwh (simplified as one unit of power consumed at home) and the remaining life at 23 years. The tariff rate is attractive considering the current power offtake rates. Based on the resource mix of the acquired assets, the weighted average realization would have come to ₹2.9 per unit, as the current bidding trends suggest that solar power rates have dropped to ₹3 per unit and wind power to ₹3.5 per unit. O2 Power has contracted 87% of the power offtake with utilities that reduces the risk of receivables turning bad.
Also, there is high visibility for 4.7GW capacity. About 1.2GW capacity is operational and likely to reach 2.3GW within six months. O2 Power has already acquired 40% of the required land for the under-construction projects of 2.4GW and there is visibility for acquiring the rest of the land.
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Plan in process
The part that is unclear is how this acquisition will be funded. The management said the details of funding will become clear later as the transaction is likely to be closed in about six months. Generally, the debt-equity ratio in such projects is 3:1. The management estimates equity IRR (internal rate of return) of the entire transaction at higher than 17%. However, it should be noted here that JSW Energy’s net-debt-to-Ebitda ratio is already high at 4.1x at September-end.
This is the second big acquisition in renewable energy space by JSW Energy through JSW Neo Energy, a wholly-owned subsidiary, in a span of two years. The first was of Mytrah Energy, which was done at ₹10,150 crore for 1.75GW. Interestingly, both acquisitions have been done at the same price of around ₹5.5 crore per MW, if the total cost of completion of 4.7GW of ₹26,000 crore is taken. The cost per MW is competitive especially as it shortens the time for scaling up of capacity.
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Since FY27 will be the first full year of 2.3GW capacity getting operational, the acquisition is valued at EV/Ebitda of 8.3x, much cheaper than JSW Energy’s own valuation of 12x based on Bloomberg consensus estimates for FY27. Thus, the acquisition is positive for JSW Energy.