JSPL buyout: JSW Energy got a good bargain: Murtuza Arsiwala, Kotak

In a chat with ET Now, Murtuza Arsiwala, Power Analyst, Kotak, says JSW Energy getting the asset at a good discount to replacement cost. Edited excerpts

ET Now: Sajjan Jindal-led JSW Energy Ltd has said it will buy 100% of Jindal Steel and Power Ltd’s (JSPL) 1,000 megawatt (MW) thermal power plant in Chhattisgarh at an enterprise value of Rs 4,000 crore. How have you read into the deal and more importantly what would it mean for JSW Energy?

Murtuza Arsiwala: I think what they have done is they have structured the transaction pretty well where they have said that in its current form, it is without any fuel supply agreements or long term power sale agreements they are willing to pay an enterprise value which is about Rs 4000 crore which if you see is at a steep discount to current replacement value of power plants. So they have got themselves a good bargain out there. And the alternate if JSPL is able to secure a fuel arrangement for and power sale arrangement which assures a reasonable return then they are willing to pay Rs 6500 crore which is really the replacement cost of a 1000 megawatt plant in which case also there would not be any stress.

In terms of the Rs 4000-crore scenario, if one were to look at the current operating levels of the Tamnar 1 plant which is about 60 per cent odd in fourth quarter, I think with a 60 per cent utilisation and let us say an EBITDA of about Re 1 per unit, the plant would be able to sort of support its Rs 4000 crore enterprise value, which may not be substantially value accretive. But the key of the plant is its location as it is in great proximity to coal resources which makes the landed price of coal very cheap. JSPL lost the coal mines and was not able to win it back under the auction, they are involved in legal disputes but that does not take away from the advantage of the plant location. So it could be neutral to be positive. Once the balance sheet stress comes in, they already had a 1.7x net debt but they have bought themselves time and again. There is a one and half year timeline to conclude the transactions. So they have bought themselves time and sufficient comforts to sort of ensure that it is not a drain or value destructive because the valuation looks pretty good in terms of 4000 crore.

ET Now: Let us work with the hypothesis that they eventually have to pay Rs 6000 crore because of the extended PPAs as well and let us assume that the timelines are about a year. You do not believe that puts an additional stress on JSW Energy and even if it does, do you think there is a possibility of equity fundraising is around the corner for JSW Energy?

Murtuza Arsiwala: Well let us look at it this way, if they have to pay Rs 6500 crore in case JSPL is able to secure both PPAs and fuel supply agreements and a reasonable return is being assured. it may not be that bad. Yes, there would be stress on the balance sheet but maybe the equity dilution would not be immediate but in a closer to deal consummation depending on how the financials play out and there are cash flows from existing operations which will come through in the next one-one and half year. So maybe Rs 6500 crore will be a little larger, a little more and may raise an equity dilution. As for Rs 4000 crore one and a half year down the line, the chances are less likely that you will need equity dilution. So the scenario is not looking too bad. For increasing the leverage, they may have to go in for equity dilution. But I think the case that they have not paid a premium to replacement cost and that would have been sort of a bigger worry where the return ratios would have been diluted. In fact, in the Rs 4000 crore scenario, you are actually getting that asset at a good discount to replacement cost.