JSW Energy Ltd has won a three-year contract to supply 290 megawatts (MW) of electricity from its Vijayanagar plant in Karnataka. In May, the company had said that it was the lowest bidder for the contract. So, the latest communication does not come as a major surprise.
The contract will remove an earnings overhang for JSW Energy. The 860MW Vijayanagar plant is operating at sub-optimal levels due to lack of enough power purchase agreements (PPAs) with electricity distribution companies. The plant operated at 38% utilization last quarter, as the accompanying chart shows.
The latest PPA can improve Vijayanagar plant’s utilization levels by up to 60% in this fiscal year and to 85% by FY21, says Santosh Hiredesai, an analyst at SBICAP Securities Ltd.
Importantly, the approval for the PPA comes amid subdued prices in the country’s spot electricity market. Average market clearing price per unit stood at ₹3.32 on the Indian Energy Exchange last month. Comparatively, JSW Energy won the above mentioned PPA at a tariff of ₹4.41 per unit.
The Vijayanagar plant functions on imported coal, which is generally costlier than the domestic variety. However, with coal prices softening in the international markets, the PPA should be remunerative for JSW Energy, points out Hiredesai of SBICAP Securities.
That brings us to the growth question. After the implementation of the contract, all power plants of JSW Energy will have PPAs generating steady cash flows.
Elara Securities (India) Pvt. Ltd estimates JSW Energy’s operations to generate a strong cash flow of about ₹1,700 crore by FY21. With net debt-to-equity ratio of less than one time, the company will be well placed to invest for growth.
But its pursuits till now have not yielded any major results. While one should applaud the management for its cautious approach, clarity on cash deployment is also crucial.
“JSW Energy has a strong balance sheet to benefit from consolidation in the generation sector, but value creation will be subject to when and at what value it will be able to conclude deals," Motilal Oswal Financial Services Ltd said in a note last month.