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Signs agreement to acquire GMR Kamalanga
Leveraging on its strong balance sheet; Upgrade to Buy
*JSW Energy (JSWE) has signed a share purchase agreement to acquire GMR Kamalanga (1,050MW). The deal is valued at a maximum amount of INR53b (implying an EV of INR51m/MW).
* We see the transaction as value accretive for JSWE, given the strategic location of the plant, room for merchant volumes, and the company’s ability to reduce interest and O&M costs post acquisition. Moreover, the move lends visibility to JSWE’s capital deployment. We raise our FY21/22 EPS estimates by 15/8% to account for the takeover of Kamalanga from FY21. Upgrade to Buy with a TP of INR78/sh (23% upside).
GMR Kamalanga – asset strategically located near coal belt
* GMR Kamalanga (3x 350MW) is strategically located in Orissa near the coal belt region. Accordingly, variable costs are low at just INR1.5-1.6/kWh. In terms of PPA, 84% of the plant’s capacity is tied up under long-term agreements (25 years) with Odisha (263MW), Haryana (334MW) and Bihar (283MW). The balance 170MW is available for sale/merchant.
* Given the strategic location of the plant, fuel supply linkages are tied for the entire PPA. Besides, the company has recently secured another 0.4mtpa for part of its balance merchant capacity.
Management expects EBITDA of INR9b in FY21
* JSWE expects EBITDA of INR9b for FY21, led by contribution from open merchant capacity (INR1.25b). The company noted given working capital crunch at the plant, the asset was unable to buy coal/run the untied capacity. Upon takeover, JSWE believes it can easily utilize this capacity for merchant sales (@90% PLF of open capacity and spreads of INR1/kWh). Further, with tie ups under Shakti, a favorable position under Pilot Scheme-II (150MW) and efficiency gains on O&M post takeover, EBITDA can potentially rise to INR1.05b.
* The transaction value of INR53b includes contingent payable of INR6.15b. According to JSWE, this largely relates to dispute with a particular contractor. The company’s share of liability arising from this is INR3.15b, while the remaining liability is with the seller. On a conservative basis, JSWE has included the entire amount as consideration for the deal.
Kamalanga to be value accretive; Upgrade to Buy
* Given the strategic location of the plant, scope to improve efficiencies and headroom through merchant volumes, we expect the deal to be value accretive (expect IRRs of ~17-18% at debt: equity of 80:20).
* Furthermore, the move lends visibility to the company’s capital deployment plan. Balance sheet would remain under check (FY21E net debt: equity of 1.1x) and provide room for acquiring new assets as well (the co. is in discussion for acquiring Ind Barath Utkal – 700MW).
* Final approvals would come in place soon and JSWE is hopeful of completing the transaction by the end of the year. Accordingly, we raise our FY21/22 EPS estimates by 15/8% to account for the takeover of Kamalanga from FY21. Upgrade to Buy with a target price of INR78/sh (22% upside).
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