Jaiprakash Power Ventures

Investors with high-risk appetite and long-term investment horizon should hold on to the Jaiprakash Power Ventures (JPVL, until recently named Jaiprakash Hydro Power) stock.
The merger of the group's power assets into the company may give it access to new capacity additions of about 1000 MW of hydro power in 15 months time, with further additions thereafter which could contribute immensely to the bottomline.
Despite the earnings dilution and high valuation premium being paid compared to peers, the increase in merchant power off-take from its capacity additions may more than compensate for the dilution beyond the next fiscal — FY-12. The benefits of the amalgamation may, however, accrue over the long term and carry challenges such as timely execution and adequate funding.
The recently renamed Jaiprakash Power Ventures has been created through the merger of the former Jaiprakash Power Ventures with Jaiprakash Hydro Power in the swap ratio of 1:3 (three shares of Jaiprakash Hydro for one of JPVL). The record date is set on January 04, 2010. As a precursor to this merger, Jaiprakash Hydro Power has already been renamed Jaiprakash Power Ventures.
The stock already appears to have factored in the near-term impact of the merger. The current market price of Rs 74.25, for Jaiprakash Power Ventures discounts its estimated FY-10 earnings by 65 times; but that works out to 16.5 times its estimated FY-12 earnings. This earnings/share also assumes dilution for the Rs 1500 crore of capital raising which is expected to be done over next few months.
Merger effects
JPVL (Jaiprakash Hyrdo) currently operates only a 300 MW run-of-the-river Baspa-II project in Himachal Pradesh . The merger of the former JPVL would mean that its total hydro generation capacity would reach 700 MW, post-merger. The merged entity would also have 12,770 MW of capacity added over the next nine years.
The merging company has a huge portfolio of power projects in the pipeline with good mix of hydro and thermal projects. High gestation period for the hydro projects under development may put pressure on the return on equity (ROE) of the company over the next few years, limiting the benefits from merchant power ROE (greater then 40 per cent).
The company will also benefit from CDM and certified emissions reductions on its hydro projects as well as due to the adoption of super-critical technologies for the thermal projects.
At the given swap ratio, the merging company's business has been valued at Rs 7.7 crore/MW (based on Mcap/MW for the projects which attained financial closure), expensive compared to the likes of NHPC and Tata Power (trading at Rs 4 crore/MW).
However, the valuation may be justified as the company may realise higher returns from merchant power sale for the company. The ROE for the merchant power will be higher and, during the initial years, this would compensate for the regulated ROEs of the long-term power purchase agreement. This would also allow the company to plough back higher profits into future projects.
As there are too many players in the power sector, we expect only the early movers in merchant power to take advantage of the power deficit scenario in the country. In this context, JPVL with a high proportion of hydro projects (which carry no fuel risks) may be able to capitalise well on the merchant power opportunity and could sell around 40 per cent of it as merchant power.
On the thermal facilities, too the company has managed to get captive coal mines for the Nigrie thermal project.
However, the other thermal projects are yet to get fuel linkages, which poses a significant risk. According to a CEA document, coal linkages of Bina TPP, which is expected to be commissioned by FY-12, is under consideration.
Funding
JPVL's earlier plans to come up with an IPO in 2008 were stalled due to weak equity market conditions. Though this merger may add scale, the funding of the power projects remains an area of concern.
The company now has plans to come up with a scaled-down Rs 1,500 crore follow-on offer or a private placement to take care of the future funding needs. As the projects are staggered over next nine years the company may not find it hard to fund equity of other projects with internal accruals.
The near-term funding for Nigrie thermal power project and Karcham Wangtoo hydro project is secured by discounting Rs 2,750 crore of future receivables and internal accruals.
The securitised receivables will be for a tenure of 14 years and may reduce the revenue base in the first two years. Once the new capacity additions kick in, the steep increase in revenue base may reduce the impact of this outgo.
Financials
The earnings of Jaiprakash Hydro were volatile in the last few years. As the company now operates only a 300 MW plant, the net revenues would depend on the output generated from the power projects and the pre-determined tariff which will moderate over the years. Over the next two years, investors in the merged entity have to budget, not only for limited earnings due to the regulated tariffs on current projects, but also for possible downside given that further securitization of revenues may put pressure on the topline.
However, beyond FY-12 with more than 1,500 MW coming up, the bottomline may see a sharp spike. By October, 2011 Karcham Wangtoo hydro project (55 per cent stake) and Bina Phase-I thermal power plants are the projects that may come on stream.
Outlook
Jaiprakash Associates' expertise in EPC and BOP contracts in hydro project would reduce the execution risk to some extent. The company, in joint-venture with Power Grid, has also forayed into transmission. The key risks that apply to hydro-projects pertaining to natural disasters are relevant here. Rivers over which the company has projects are perennial and inconsistent water flow may lead to temporary plant disruptions.
According to the new hydro policy, if the projects get delayed, the proportion of power that can be sold through the merchant route will fall.
via BL