Home > Markets > Mark To Market > Prudence takes precedence over growth at JSW Energy as virus bites

JSW Energy Ltd has put on hold its plan to acquire GMR Kamalanga Energy Ltd, which owns and operates a 1,050-megawatt (MW) thermal power plant in Odisha. In February, JSW Energy had said it will acquire the company for 5,321 crore.

With the private sector hardly building new thermal power plants, acquisitions were seen to be the way to accelerate growth. Besides, the availability of stressed power plants at low valuations has increased.

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Graphic: Naveen Kumar Saini/Mint

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But with covid-19, and the resultant slump in demand, buyers are having a rethink. Ratings agency Icra Ltd estimates that thermal power sector utilization levels will fall from the already low levels of 56% in FY20. JSW Energy’s latest results underscore weak demand trends. Electricity generation dropped both in the March quarter (Q4) and in FY20. “Power demand over the short term is expected to be muted. There have been major disruptions in supply chain and logistics, including disruptions in billing and collections for discoms," JSW Energy said in a statement.

Against this backdrop, it seems prudent for JSW Energy to exercise caution. But that leaves the growth question unanswered.

“In our view, with an under-leveraged balance sheet, strong free cash flow and resilient Ebitda, inorganic growth was critical for JSW Energy’s re-rating. The kicker from acquisition now gone, the stock may languish," Edelweiss Securities Ltd said in a note. Ebitda is earnings before interest tax depreciation and amortization.

Thanks to a good share of long-term power off-take agreements, JSW Energy generates decent cash flows. Around 81% of its power plant capacity is now tied-up with long-term power off-take contracts.

This reduces the firm’s dependence on short-term power markets, helping it manage costs better. So, despite 8% fall in revenue, operating earnings rose 10% last quarter. Reported profit for the full year was up 58%.

The company is using the cash flows to repay debt. Last quarter, it had reduced net debt by 585 crore. Still, with net-debt equity at a comfortable 0.77 times, JSW Energy has no urgency to rush debt repayments. The firm has not completely ruled out acquisitions. Acquisition of the 700 MW Ind-Barath Energy (Utkal) Ltd is still in process, and it may focus on adding renewable energy capacities instead, the management told analysts.

But with no major renewable energy projects in the pipeline, growth outlook looks constrained. “While we see prudence in JSW Energy wanting to hold on to cash, if growth opportunities do not emerge or dividend pay-out is not raised, concerns may arise over capital allocation," said Motilal Oswal Financial Services Ltd analysts.

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