Enter company after uncertainty about listing and fair price is automatically discovered.

JSW Energy Limited is tapping the capital markets with an issue to raise upto Rs 2700 crs. The issue opens on Monday and is also offering a discount of Rs 5 per share to retail investors.
The company proposes to set up power plants of 3650 MW for which financial closure has been achieved and a further 7740 MW in the planning and development stage.

The JSW group is in to various businesses. Currently it has large interests in steel manufacturing, and power business. It has interests in aluminium, cement, infrastructure and software. JSW is a part of the O.P.Jindal group. The present issue is for financing construction and development of identified projects and the 400 KV transmission project and mining venture.

Projects
The company has in generation 995 MW as follows:-

The projects under implementation are as follows:-

The projects under implementation total 2655 MW and except the hydro project at Kutehr are expected to be commissioned in a phased manner roughly 3140 MW in generation by April 2011. The company has in place necessary coal linkages or imported coal to run these plants. The Jaigarh plant is based on imported coal, while the Barmer plant is based on lignite. Mining for the same is yet to begin and is some time away before it happens. Presently the one plant which has been commissioned in Barmer is being run on imported coal.

The company is also setting up a transmission line in the state of Maharashtra. This would be two 400kv double circuit quad moose transmission lines from the Jaigarh plant in Maharashtra to New Koyna and Karad. These transmission lines are being laid as part of a JV with Maharashtra state where the company has a 74% stake and the state utility company 26%.
JSW energy is into power trading and has also entered into a JV with Toshiba Corporation of Japan for manufacture of steam turbine generation equipment. The company has also entered into mining activity in Rajasthan and a JV with Mahanadi Coal Field Limited for coal miming in Orissa.

Financials
The company has reported a topline of Rs 1326.1 crs for March 2008, Rs 1851.2 crs for March 2009 and Rs 909.4 crs for the half year ended September 2009. The profit after tax for the same period has been Rs 323.4 crs, Rs 279 crs and Rs 269.5 crs respectively. The company has been doing well and has demonstrated its execution skills, its ability to commission projects on schedule and become a formidable player in its area of chosen interest.

Business Strategy
The company has a mix of short term and long term PPA’s (power purchase agreements) in place. The current ratio is 45:55 with short term being 45 and long term being 55. This ensures a steady income flow to the company and takes care of the overheads. The merchant power sale helps in better realisations and also helps in increasing the profits substantially.

Objects of Issue
The objects of the issue are as follows:-

Strengths
JSW Energy has demonstrated its execution skills and successful implementation of projects. Even recently one has witnessed quite a bit of controversy over the plant located in Ratnagiri at Jaigarh. I personally took the time out and visited the plant and was impressed with the progress at the site. The company has initiated a number of projects under “CSR” and has been taking care of the community. The 4 X 300 MW project is on schedule and the first 300 MW project is likely to be commissioned on schedule by the end of March April 2010. The adjoining port also has been developed and the jetty is ready to start handling coal well in time before the plant is commissioned.

The company is already running power plants in the JSW Steel plant for over 15 years now and running them very efficiently. Chinese equipment which has been ordered for the Ratnagiri plant is already under operation in Vijayanagar and is running efficiently. The equipment or the performance is not new to the company. The coal linkages are in place for the projects under construction. 

Weaknesses
There is a sharp drop in prices of merchant power and this weakness could affect the overall profitability of JSW Energy. Imported coal which forms the basis of the bulk of fuel linkage of JSW Energy is subject to fluctuation and currency movements. Any sharp movement could affect the company adversely and with an almost 50% dependence on merchant power could hurt the company. Currently lignite mining has not begun in Rajasthan. Using imported coal from the port in Gujarat is not only expensive, but also hurts because lignite uses low value coal and therefore the technology also is inferior compared to the other units. The use of imported coal means higher costs and is not beneficial to the company at all. 

Merchant power rates are therefore the key to the company’s performance.

Valuations
Based on the current market capitalisation of Rs 16500 to Rs 18500 crs for 3140 MW in 2011 is not cheap by any standards. The fact that three power companies IPO’s since August 2009 are still in the red and investors are unhappy about the negative returns in these offerings. Even heartbreaking has been the fact that while these issues themselves are trading in the negative, broad markets have gained substantially making investment in power companies look ridiculous or unwarranted for.

On like to like basis one could compare JSW Energy to Tata Power who has reported a profit after tax for the first half of 2009-2010 of roughly Rs 936 crs. The company has a substantially higher market cap of roughly Rs 32000 crs, but it is into almost all the activities that JSW Energy is into. It may also be important to note that Tata Power is setting up a mega project of 4000 MW in Mundra and this plant would also be in operation in the next 12-18 months in a phased manner. The total capacity being put up by JSW Energy in the next 18 months with the present generating capacity would be less than Tata Power’s new plant.   

Conclusion
The markets at 17100 and 5100 respectively are not cheap at this time. It would therefore make sense not to invest in a power issue at current prices because of two reasons. The first reason is that the sentiment against power companies is extremely poor and the name ‘power’ is today like a bad word in the market place and investment is not forthcoming. Secondly there is a discount on the shares being offered in the grey market. Readers would recall that the company is offering a discount of Rs 5 to retail investors. An application of 900 shares can be made at cut off currently. Assuming full allotment it means that the discount earned by the retail applicant at full allotment would be Rs 5 x 900 shares or Rs 4500. Of this he is prepared to offer half to the buyer and ensure that the applicant has a net profit of Rs 2250 and no risk with listing price. The retail portion of 30% means roughly Rs 810 crs and about 1.75 lakh applications to 2 lakh applications to subscribe the retail portion.

I believe it is a great business, great company but with such a big factor like sentiment and past track record of power issues, one should stay away from current application. It would make better sense to invest or enter into the company after listing so that the three week blackout risk post the closure of issue is eliminated and secondly the bad sentiment is taken care of.  

In conclusion, I believe it makes sense to currently stay away and enter the share on listing day or in the week of listing.