Tuesday, 15 August 2017

JSW Energy - A Power Company

After Steel the second largest sector which contribute most of the stressed loans in Bank books is Power Industry. There are many factors due to which Power sector is in stress –

1. Bad health of Discom - All State electricity board in India are in bad health & due to it they are unable to pay the Power generation companies in time & also unable to purchase enough electricity, as their inability to pay the Power companies.  This affect power companies as first they are unable to sell the electricity generated second late payments affect their working capital requirements means they need to pay interest to Banks for working capital needs.

2. Huge Debts - Establishing a Power Company require huge capital & interest payments which affects their bottom line.

3. Gas based Plants - There is shortage of gas in our country & due to the same, the gas based plants become un viable. Most gas based plants in India are either inoperative or running at very low capacity like GMR, GVK, Reliance Powet gas based plants.

Now when this Power sector is in distress, why we are discussing a Power Company.  In Warren Buffet words buy a company which is in cyclical distress but have value and when the cycle turns so do the fortune of the company. Now we discuss some factors which could change the fortunes for JSW Energy.

JSW Energy Limited is in the business of power generation and transmission primarily in the states of Karnataka, Maharashtra, Rajasthan, Himachal Pradesh, and Chhattisgarh. The Company has its presence across the entire value chain of the power sector including power generation, power transmission, mining, power plant equipment manufacturing and power trading.

1. Valuation - Lowest price to book value compared to its peers.
2. Purchase of Assets at cheap valuations.
3. Rising Economy - Currently Indian GDP growth is around 8% highest among countries and with various Govt. initiatives this could reach double digit. Govt. plans like Make in India is showing results & many electronic & mobile companies have started manufacturing in India, and many others have lined up setting manufacturing unit in India in different sectors like Defence,  Shipping, Electronics etc.. First requirement of all these manufacturing units would be uninterrupted electricity supply. This would overall enhance the demand for electricity & results in growth in top line for Power generation companies.

4. Government UDAY Yojna - Government had introduced Uday scheme where State discoms could convert their debts into long term bonds with guarantee from Govt. This is heling Discoms reducing their debts & savings on interest payments to Banks. With more states coming in this scheme,  would allow Discoms to purchase more electricity & making payments to Power companies in time.

5. Prices of Coal peaking - Coal is the major raw material for Thermal power and in last one year, prices of coal had increased in some recent years In our view now the same had peaked as more solar plants are installed around the world & China reducing its thermal power generation, the demand of coal would decrease in coming future which would result in decreasing coal prices in international market.

6. Debt to Equity ratio - JSW Energy debt to equity ratio is at 0.35 , which is lowest compared to peers.  It not only help company by low interest payment but also gives head room to expand, as shown in past when company was able to buy good assets from other stressed companies for low valuation. Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations

7. Declining Interest Rates - Inflation had dropped to lowest 1.5% and there is all possibility that RBI would reduce the Repo rates. This would help company in reducing its interest payments & more profits for investors.

JSW Energy’s Entry in Electrical Vehicle Industry
The Board of Directors have approved the company’s foray into electric vehicle, electrical battery / energy storage system, and charging infrastructure manufacturing either directly, or through subsidiaries it sets up. Capital investment is in the region of Rs 3,500 – Rs 4,000 Cr. in three years. With the Indian automobile industry projecting growth, the market provides an opportunity to new entrants to venture into electric vehicle technology projects. JSW Energy plans to launch its own electric vehicle by 2020 under the ‘Make in India and Make for India’ momentum.JSW aligns its new electric vehicle foray with Government of India’s ambitious plan of all electric cars by 2032. With needs arising and charging infrastructure being at a nascent stage, JSW Energy looks forward to capitalize on new opportunities. The move will create new growth opportunities for the company. JSW Energy is keen on developing charging infrastructure and necessary systems to aid electric vehicle market growth. Apart from energy storage systems for electric vehicles, the country shows promise for storage systems in static applications, i.e., telecom, micro grids, solar storage system for household, and power banks. JSW Energy is eyeing energy storage systems business for static and mobility apps, the next step forward from its current power generation business. Government spending on infrastructure development, favorable interest rates and GST implementation should boost GDP growth and power demand.

JSW Energy Ltd. key Products/Revenue Segments include Power which contributed Rs. 3823.31 Cr to Sales Value (94.61 % of Total Sales), Sale of services which contributed Rs.152.78 Cr to Sales Value (3.78 % of Total Sales), Lease & Other Income which contributed Rs. 62.91 Cr to Sales Value (1.55 % of Total Sales), Lease Rentals which contributed Rs. 62.91 Cr to Sales Value (1.55 % of Total Sales) and Other Operating Revenue which contributed Rs.1.97 Cr to Sales Value (0.04 % of Total Sales)for the year ending 31-Mar-2017.

For the quarter ended 30-06-2017, the company has reported a Consolidated sales of Rs. 2231.64 Cr., up 19.85 from last quarter Sales of Rs.1862.08 Cr. and down -7.45 from last year same quarter Sales of Rs. 2411.24 Cr. Company has reported net profit after tax of Rs. 220.91 Cr. in latest quarter.
Currently stock is trading @ 1 w.r.t. Price to book value having market cap of Rs. 10530 Cr. With EPS of 1.33.Promoters have strong shareholding of 75 %

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