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India Equity Research | Power IPO note

JSW ENERGY
No margin for error

JSW Energy Limited (JSWEL) is tapping the capital market to raise INR 27 bn by December 4, 2009
offering shares in the INR 100-115/share price band. A discount of INR 5/share is
being offered to retail investors.
Reuters : NA.BO Bloomberg : NA IN

„ Large project pipeline; 46% output on merchant/short-term basis


EDELWEISS RATING
JSWEL has 995 MW of operational capacity, 2,655 MW under construction, and
DO NOT SUBSCRIBE
7,740 MW under development. Out of the operational 995 MW, 560 MW will be
sold on merchant basis from FY11 (as per management). Out of the 3,650 MW
operational and under development capacities, ~46% output is expected to be
sold on merchant/short-term basis and ~54% will be sold on long-term basis by
MARKET DATA
FY12.
Price band (INR) : 100-115
52-week range (INR) : NA

„ Financial closure achieved for 3,140 MW Post IPO share in issue (mn) : 1,608-1,643
M cap (INR bn/USD mn) : NA
The company has achieved financial closure for 3,140 MW of operational and
Avg. Daily Vol. BSE/NSE (‘000) : NA
under construction projects. Financial closure of 270 MW RWPL-II lignite plant and
240 MW Kuther hydro project is pending. However, JSWEL has placed the BTG
order for RWPL-II. It has also submitted a revised DPR to CEA for Kuther project.
SHARE HOLDING PATTERN (%)
Promoters : 76.6-78.3
Non-Promoters : 21.7-23.4
„ Targeting 11,400 MW by 2016
Besides the 3,650 MW of projects under construction, JSWEL is planning to
develop 7,740 MW projects by 2016.

„ Fuel tied up, but price risks remain


JSWEL has tied up fuel for 3,380 MW out of the 3,650 MW of operational and
under construction projects—1,080 MW will run on domestic lignite, 2,060 MW on
imported coal, and 240 MW is hydro capacity. All the purchase contracts for
imported coal are linked to the RB Index, exposing the company to fuel price risk
as the power tariff may not be aligned to the coal index.

„ Valuation: No margin for error; ‘DO NOT SUBSCRIBE’


Our NPV–based valuation of JSWEL stands at INR 82-84/share. We believe that
the price band of INR 100-115/share leaves no margin for error. Execution delays,
high coal prices, change in regulations in Indonesia, and operational risks
pertaining to lignite plants are some of the key risks. We recommend ‘DO NOT
SUBSCRIBE’ to investors as there appears to be limited/no upsides.

Shankar.K
+91-22-4040 7412
shankar.k@edelcap.com

Abhishek Bhandari
+91-22-4063 5496
abhishek.bhandari@edelcap.com

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Power

„ Objects of the issue


• To part finance the construction and development costs of identified projects.

• Repayment of corporate debt.

• General corporate purposes.

Table 1. Use of IPO funds (INR mn)


Project/activity Amount
Finance construction and development of identified projects 21,425
Repayment of corporate debt 4,700
General corporate purposes [ .]
Source: RHP

„ Shareholding pattern
Table 2. Shareholding structure pre and post the IPO
Name of Shareholder Pre-issue Post-issue @ 100/share Post-issue @ 115/share
Number of Share- Number of Share- Number of Share-
shares (mn) holding (%) shares (mn) holding (%) shares (mn) holding (%)
Promoter & promoter group 1,258 91.7 1,258 76.6 1,258 78.3
Others 114 8.3 294 17.9 271 16.9
Public - - 90 5.5 78 4.9
Total 1,373 100.0 1,643 100.0 1,608 100.0
Source: RHP

„ Details of issue
Table 3. Issue details
Share price of 100 Share price of 115
Amount to be raised (INR mn) 27,000 27,000
Fresh issue of shares (mn) 270.0 234.8
Existing shares (mn) 1,372.7 1,372.7
Number of shares post issue (mn) 1,642.7 1,607.5
Source: RHP, Edelweiss research

„ Company background
JSWEL was incorporated in 1994 and has been in the business of power generation since
2000. It currently has 995 MW of operational generating capacity and 2,655 MW of
generating capacity in the construction or implementation phase. In addition, the
company has power generation projects at an early stage under development with a
proposed combined installed capacity of 7,740 MW.

Table 4: Existing capacities


Project Capacity CoD Power purchase agreements Fuel
JSWEL SBU1 260 MW Jan-00 Short term - 260 MW Imported coal
JSWEL SBU2 600 MW Sep-09 Short term - 294 MW, long term - 300 MW (20% RoE) Imported coal
RWPL 1 135 MW Nov-09 Long term at 15.5% regulated RoE Domestic lignite
Source: RHP, Edelweiss research

The company has formed a 74-26 JV with Maharashtra State Electricity Transmission
Company (MSETCL) to evacuate power from its Ratnagiri plant. It also has a 49-51 JV
with Rajasthan State Mining Company for mining lignite for its 1,080 MW lignite power
plant in Rajasthan.

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JSW Energy

JSWEL (20% stake) has also formed a joint venture with Toshiba for manufacturing
steam turbines and generators.

„ Projects under construction


JSWEL has 2,655 MW of projects under construction. Most of these are expected to come
up by FY12.

Table 5: Projects under construction


Project Debt: JSWEL's
Project Capacity CoD Power purchase agreements Fuel cost equity stake
(INR mn) (%)
Power generation MW
Ratnagiri 1200 Oct-09 Short term - 600 MW, long term - Imported coal 45,000 3:1 100
600 MW (MSEDCL - 300 MW, AEL -
300 MW)
RWPL I 945 Oct-09 Long term at 15.5% regulated RoE Domestic lignite 50,000 3:1 100

RWPL II 270 Jan-13 Short term Domestic lignite / 13,500 3:1 100
imported coal
Kuther 240 Dec-15 Short term NA 19,152 1.27:1 100
Transmission km
JPTL 169 Jun-10 Long term NA 5,800 3:1 74
Mining
BLMCL 7 mtpa Jul-10 Long term at regulated prices NA 7,028 0.9:1 49

Source: RHP, Edelweiss research

In addition, the company is pursuing 7,740 MW of projects which are expected to come
up by FY16.

Table 6: Projects in pipeline


Capacity Project cost
CoD
Project (MW) (INR mn) Fuel
Maharashtra 3,200 150,007 Imported coal Apr-15
Chhattisgarh 1,320 65,000 Domestic coal Aug-14
West Bengal 1,600 76,800 Domestic coal Feb-15
Jharkhand 1,620 79,380 Domestic coal Aug-15
Total 7,740 371,187
Source: RHP, Edelweiss research

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Power

„ 46% output from 3,650 MW to be sold on merchant/short-term basis


Of the 995 MW operational capacities, JSWEL is currently selling 260 MW to group
company (JSW Steel). Management expects this capacity to be available for sale on
merchant basis once JSW Steel’s captive power plant is ready by FY11. Thus, 560 MW
out of the currently operational 995 MW will be sold on merchant basis from FY11.
However, from the operational capacity of 3,650 MW by FY12, 46% of the output will be
sold on merchant basis and the balance on long-term basis.

„ Fuel supply secured for 3,380 MW projects


JSWEL has tied up fuel for 3,380 MW out of the 3,650 MW of operational and under
construction projects—1,080 MW will run on domestic lignite, 2,060 MW on imported coal,
and 240 MW is hydro capacity. All the purchase contracts for imported coal are linked to
the Richard Bay Index, exposing the company to fuel price risk as the final power tariff
may not be aligned to the coal index. Management has stated that it is exploring options
of buying coal mines in Indonesia, Mozambique, and Australia to secure its fuel supplies
for under construction and pipeline projects.

„ Valuation
We have done a NPV-based valuation for 3,410 MW of operational and under-
construction projects and the 169 km transmission line JV. We have valued all the
projects at 13% cost of equity. We have not valued 270 MW RWPL II as the lignite
linkage is pending and 240 MW Kuther project as the company has filed for a revised
DPR with CEA. Our valuation stands at INR 82-84/share depending on the dilution
(13.4% at upper band and 15.1% at the lower band).

Table 7: Valuation summary


Capacity NPV
Power MW INR mn
JSWEL SBU1 260 34,802
JSWEL SBU2 600 19,872
RWPL-I 1,080 12,643
Ratnagiri 1,200 39,746
Power- total 3,140 107,064

Transmission km INR mn
JWTPL 169 768
Total 107,832
IPO money 27,000
Post-IPO valuation 134,832
Value/share @ lower band 82
Value/share @ upper band 84
Source: Edelweiss research

At the offer price of INR 100-115/share, the stock is being offered at ~2.7-2.8x post
issue book value. We believe it is leaving limited room for error by assuming negligible
execution and fuel risks. We see limited/no upsides at the offer price and recommend
‘DO NOT SUBSCRIBE’ to our investors.

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JSW Energy

„ Sensitivity analysis
We have done sensitivity on the value share on various scenarios of cost of equity,
merchant rates beyond FY12, gross PLF and FOB coal cost.

Table 8: Sensitivity of valuation/share on cost of equity and merchant rates


Merchant rate (INR/kWh)
84 3.0 3.5 4.0 4.5
12% 60 73 86 100
Cost of equity 13% 58 71 84 97
14% 57 69 82 94
15% 55 67 80 92
Source: Edelweiss research

Table 9: Sensitivity of valuation/share on gross PLF and merchant rates


Merchant rate (INR/kWh)
84 3.0 3.5 4.0 4.5
80% 55 66 77 88
Gross PLF 85% 56 68 80 92
90% 58 71 84 97
95% 60 74 88 101
Source: Edelweiss research
Table 10: Sensitivity of valuation/share on gross PLF and FOB coal cost
Coal price (FOB - USD/ton)
84 35 40 45 50 55 60
80% 87 84 80 77 73 70
Gross PLF 85% 92 88 84 80 76 73
90% 96 92 88 84 80 76
95% 101 96 92 88 83 79
Source: Edelweiss research

Table 11: Sensitivity of valuation/share on merchant rates and FOB coal cost
Coal price (FOB - USD/ton)
84 35 40 45 50 55 60
3.0 71 66 62 58 54 50
Merchant rate 3.5 83 79 75 71 67 63
4.0 96 92 88 84 80 76
4.5 109 105 101 97 93 89
Source: Edelweiss research

„ Key risks to our call


1. Securing coal supplies at significantly lower costs than current contracts.

2. Faster-than-expected execution.

3. Higher-than-expected merchant rates (our assumption is INR 4/kWh in FY13 and


beyond).

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Power

Financial Statements

Income statement (INR mn)


Year to March FY06 FY07 FY08 FY09 FY10*
Sale of power generated 5,308 7,340 9,313 12,394 8,547
Power traded - 299 172 5,778 -
Operator fees 110 131 171 179 89
Other income 71 346 3,605 171 118
Total income 5,489 8,115 13,261 18,522 8,754
Purchase of power - 296 167 5,744 -
Cost of fuel 2,558 2,648 3,122 6,202 3,244
Employees cost 62 88 155 271 126
Operation, maintenance & Other exp 381 460 723 814 345
Total expenses 3,000 3,492 4,167 13,032 3,715
EBITDA 2,489 4,623 9,094 5,490 5,038
Depreciation 580 583 586 602 479
Interest and finance charges 497 630 886 1,209 1,095
Profit before tax and extra-ordinary items 1,412 3,410 7,623 3,678 3,464
Provision for taxation 223 506 1,370 911 789
Core profit 1,189 2,905 6,253 2,767 2,676
Profit after tax 1,189 2,905 6,253 2,767 2,676
Extraordinary items 135 (184) (3,015) 23 19
Profit after tax after extra-ordinary items 1,324 2,721 3,238 2,790 2,695
Shares outstanding (mn) 1,076 1,183 1,074 1,368 1,368
EPS (INR) basic 1.2 2.3 3.0 2.0 2.0
Diluted shares (mn) 1,076 1,183 1,074 1,368 1,368
EPS (INR) diluted 1.2 2.3 3.0 2.0 2.0

Balance sheet (INR mn)


As on 31st March FY06 FY07 FY08 FY09 FY10*
Gross block 10,731 10,865 11,144 11,519 29,642
Less: Depreciation 3,567 4,152 4,742 5,349 5,822
Net block 7,164 6,713 6,402 6,170 23,820
Capital work in progress 116 2,729 27,420 79,190 79,874
Net fixed aseets 7,280 9,442 33,822 85,360 103,694
Investments 3,455 3,675 207 1,705 1,995
Inventories 215 231 301 323 1,368
Sundry debtors 4,675 3,899 693 1,409 3,474
Cash and bank balances 448 2,745 2,949 1,751 1,590
Loans and advances 249 1,035 1,092 1,958 3,039
Current assets, loans and advances 5,587 7,910 5,035 5,441 9,471
Secured loans 4,383 6,045 22,721 59,266 75,757
Unsecured loans 6 1,026 6 6 1,006
Deferred tax liability (net) 443 559 685 814 954
Current liabilties and provisions 6,497 9,997 29,322 77,899 97,856
Less: Liabilities and Provisions 11,329 17,628 52,733 137,985 175,572
Share capital 2,890 3,468 5,148 5,466 13,664
Reserve and surplus 6,935 7,733 4,767 9,320 3,812
Net worth 9,825 11,201 9,914 14,786 17,476
Book value 9.1 9.5 9.2 10.8 12.8
* - April to September 2009

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JSW Energy

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Nischal Maheshwari Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): Power


Adani Enterprises, CESC, GIPCL, GVK Power, GMR Infrastructure, Lanco Infrastructure, NTPC, Power Grid Corporation, Reliance
Infrastructure and Tata Power

Recent Research

Date Company Title Price (INR) Recos

19-Nov-09 Power Deciphering the power


puzzle; Sector Update

31-Oct-09 Adani Fund raising and 717 Hold


Enterprises restructuring on way;
Result Update

31-Oct-09 Reliance Going’s steady; 1,058 Buy


Infrastructure Result Update

30-Oct-09 GVK Power Higher O&M expenses 44 Hold


& Infra hurt earnings; Result Update

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 87 51 13 153 Buy appreciate more than 15% over a 12-month period

* 2 stocks under review


Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 94 43 16

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