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Photo: Mint
Photo: Mint

JSW Energy’s Kamalanga purchase underscores juicy bets in Indian power sector

  • Deal underscores the value of the sector, provided projects are right-sized and have sufficient power purchase pacts
  • Tata Power Co Ltd had acquired Prayagraj Power Generation at a notable discount to its book value

Mumbai: India's thermal power sector may be on a decline but for investors willing to place tactical bets, it continues to offer invaluable opportunities.

A case in point is JSW Energy Ltd’s acquisition of 1,050 megawatt (MW) thermal power plant in Odisha, owned and operated by GMR Kamalanga Energy Ltd - a unit of GMR Energy Ltd.

The company plans to purchase the power plant at an enterprise value of 5,321 crore. Around 84% of the plant’s capacity is tied-up under long term power purchase agreement (PPA) which assures revenue visibility. The plant, which is operational, has fuel linkage for the tied-up capacity and is situated in proximity to Coal India Ltd’s mines.

Last fiscal, the plant operated at 73% capacity and generated an operating profit of about 740 crore, pointed out Emkay Global Financial Services Ltd.

According to JSW, the plant has a potential to generate a minimum operating profit of 900 crore next fiscal which can go up to 1,050 crore, helped by reduction in operations and maintenance cost and sale of electricity in open market (from the idle capacity). That should enable JSW derive decent returns from the plant.

“We believe that the project could annually contribute 850 crore and 240 crore of Ebitda and profit after tax (return on equity: ~17-18%), respectively, to JSW Energy’s existing profit and loss account," Emkay Global Financial Services Ltd said in a note. Ebitda is earnings before interest tax depreciation and amortization.

The purchase price, seen in conjunction with incremental earnings, implies notable value accretion for JSW Energy.

“Under the base case scenario of 900 crore Ebitda and the acquisition price, the asset is valued at an EV/EBITDA multiple of ~5.9 times. Our reverse discounted cash flow calculations suggest at the base Ebitda, the justified multiple is ~7.1 times implying 1,000 crore of potential value accretion from the deal i.e. 6.5-7/share," analysts at SBICAP Securities Ltd said in a note.

Not surprisingly, investors have given a thumbs-up to the deal. Shares of JSW Energy gained about 6% in early deals on Tuesday.

At the industry level, the transaction underscores the deep value of the sector, provided projects are right-sized (for debt and equity) and have sufficient PPAs.

Earlier, Tata Power Co Ltd, through its Resurgent Power Ventures platform, had acquired Prayagraj Power Generation at a notable discount to its book value. Post debt reduction, the project is estimated to generate a healthy double-digit returns for buyers.

“Upfront payments to lenders will be 6,000 crore post which 1,000 crore will be further invested as capex, all financed with a debt-equity of 78/22. This is expected to earn an internal rate of return of 15-17% for RPVPL (Resurgent Power Ventures) as per our estimates," ICICI Securities Ltd said in a note on Tata Power.

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