In a country that barely adds thermal power capacity, one way to power ahead is through acquisitions.
From this perspective, JSW Energy Ltd’s proposal to take over two troubled thermal power plants is being seen as a positive. Power offtake agreements and fuel linkages—crucial cogs for power plants—are in place for both.
Low financial leverage means the company is well placed to fund the acquisition. However, two acquisitions in quick succession have raised some concerns on the debt front. CARE Ratings Ltd placed the ratings of JSW Energy on “credit watch with negative implications" citing the possibility of a significant rise in leverage from FY19’s 0.78 times.
Then, the bigger challenge for the company lies in turning around the power plants. The 1,050 megawatts (MW) GMR Kamalanga Energy Ltd is burning cash. The plant has seen cost overruns even as tariffs are fixed at competitive rates, resulting in financial losses.
The other plant, the 700MW Ind-Barath Energy (Utkal) Ltd, which JSW Energy is trying to acquire under the corporate insolvency resolution process, has been partially functional. One part of the unit is under construction, while another needs a revamp. Given the long delay in construction and commissioning of the projects, there were concerns whether electricity procurers will adhere to the terms of the original contract.
Furthermore, there is ambiguity on the kind of expenditure JSW Energy will have to incur to construct and turn around the power plants. “There are risks of project execution (phase-2), higher capex for the refurbishment of phase-1 and potential tariff re-negotiation, which will have a bearing on the final valuation," JM Financial Institutional Securities Ltd said in a note on JSW Energy’s proposal to acquire the Ind-Barath power plant.
Therefore, the price JSW Energy pays for these plants—details of which are not yet known—becomes important. Given the cost overruns and operational challenges, it is crucial for the company to acquire the said power plants at a notable discount.
If indeed acquired at a favourable price, JSW Energy can put its expertise in running a portfolio of power plants to good use.
For instance, the running and maintenance costs at GMR Kamalanga are notably higher than the costs at JSW Energy, shows an analysis by SBICAP Securities Ltd. Further, JSW Energy can utilize its superior balance-sheet strength to lower borrowing costs.
“JSW, with its expertise in operating large scale coal thermal projects and strong balance sheet should be able to improve the cost economics of the plant, when it comes under its fold," added analysts at SBICAP Securities.