India's JSW Energy eyeing hydropower and coal-fired projects of JPVL

A binding MOU has already been signed.

As per a filing with stock exchanges, India’s JSW Energy (JSWE) noted that it has signed a binding MoU with Jaiprakash Power Ventures to buy the latter’s two hydropower projects [Baspa-II (300MW) and Karcham Wangtoo (1091MW)] and the coal-fired Bina-I (500MW) project.

According to a research note from Nomura, further, as per an interview with CNBC TV18 (25 Sep), JSWE’s Chairman and Managing Director (CMD) Mr Sajjan Jindal said the time period for completion of the deal is six weeks; and the debt/equity ratio post the deal will be less than 2:1.

Nomura’s discussions with JSWE and JPVL indicate that the due diligence process has begun. While there is no indicative valuation, media reports estimate the deal size at INR125-130bn.

JSWE signed the MoU with JPVL a day after discussions between Reliance Power and JPVL for acquisition of the latter’s three hydropower projects were called off.

Here’s more from Nomura:

While RPWR in its 24 Sep press release had cited regulatory uncertainties as one of the reasons for its cancellation of the deal to buy the three hydropower assets from JPVL, JSWE’s CMD stated that JSWE doesn’t see any significant penalty on the Karcham Wangtoo project.

As per media reports (Economic Times, 19 Sep), a committee with representatives from the Central Electricity Authority (CEA) and Central Water Commission has submitted a report stating that JPVL increased the capacity of its Karcham Wangtoo project to 1200MW, vs the approved capacity of 1000MW.

Data from JPVL's August 2014 investor presentation on these three projects indicates total equity invested is ~INR37bn (as of June 2014, including internal accruals) and linked-debt is ~INR82bn. However, data from the tariff petition/orders for the projects indicate aggregate equity of~INR35bn and debt of ~INR82bn as of FY14.

As of June 2014, JSWE's consolidated cash & equivalents stood at ~INR10bn and debt stood at ~INR100bn; net debt/equity (D/E) stood at 1.3x as of June 2014 (total debt/equity at 1.4x).

In our view, the CMD’s comment that JSWE’s post-deal D/E will remain below 2:1 presumably pertains to the company’s financials excluding the JPVL assets but including acquisition debt for funding the transaction.

This implies that JSWE can pay up to 1.5x book value of the equity invested by JPVL in the three projects (up to June 2014). JSWE would need an additional ~INR39-50bn debt to fund the equity portion if JPVL’s assets are valued at 1.2-1.5x book value of equity invested (assuming JSWE uses only half of its current cash to fund the deal).

Accordingly, the company’s overall D/E would rise to 2.9-3.1x (capturing project debt at JPVL’s three assets).

We would expect the acquisition to be earnings accretive for JSWE from FY16F itself (the first full year of operations after the proposed acquisition) based on the following assumptions:

[1] RoE taken at 15.5% for Bina-I + regulated equity for Bina-I based on full project cost (INR32.4bn) submitted in its provisional tariff order;

[2] RoE at 16% for the two hydro projects + regulated equity taken as per last available tariff petition/order;

[3] For Bina-I, we only take the PPA-linked 70% offtake in our calculations; and

[4] Cost of debt (on additional debt to fund the acquisition) taken at 12%.

If we factor in the above assumptions, ceteris paribus, our proforma earnings per share (EPS) for FY16F can go up to ~INR9.4-10 (vs our current estimate of INR7.4) with JPVL’s assets valued between 1.2x and 1.5x book; thus implying EPS accretion of ~28-33% from the acquisition. Accordingly, our book value per share (BVPS) in FY16F would increase by ~5% to INR52.4 vs our current estimate of INR49.8.

JSWE’s current operational capacity is 3140MW. Acquisition of JPVL’s three assets will increase JSWE’s operational capacity to 5031MW.

Further, its offtake exposed to merchant/short-term tariffs is expected to reduce to 29% (of total offtake) by FY16F (vs 42% as per our current estimates) if the deal goes through.