JSW Energy to buy JSPL’s Chhattisgarh power project

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Mumbai: Naveen Jindal-led Jindal Steel and Power Ltd’s (JSPL) decision to sell a 1,000 megawatt (MW) power plant to elder brother Sajjan Jindal-led JSW Energy Ltd will help the former bring down debt over a period of two years while providing some immediate relief to the cash-strapped firm.

Late on Tuesday night, JSW Energy said it will buy 100% of JSPL’s 1,000 MW thermal power plant in Chhattisgarh at an enterprise value of Rs.4,000 crore, which could be increased to Rs.6,500 crore if JSPL manages to secure 100% fuel supply for the plant and enters into long-term power purchase agreements.

On Wednesday, the JSW management said the deal will only be completed by June 2018, at which point the full payment will be made to JSPL.

In the interim, JSPL gets Rs.500 crore as advance payment which will help the firm meet immediate cash needs. It will also allow JSPL to raise fresh funds against the surety of the sale agreement, said analysts.

The approvals, the process of hiving off the plant into a special purpose vehicle (SPV) and securing fuel supply would take about 18-24 months, Sanjay Sagar, JSW Energy’s joint managing director and chief executive told reporters in Mumbai on Wednesday.

Sagar said that while the valuation of Rs.6,500 crore may look high, the deal brings with it the advantage of fuel supply and power purchase agreements (PPAs), which would give JSW Energy assured returns.

The deal, which some may perceive as a lifeline thrown by older brother Sajjan to his sibling Naveen, brings relief to JSPL which has Rs.43,000 crore in debt on its balance sheet. In March, ratings agency Crisil Ltd downgraded its rating to JSPL to D, or default grade, citing delayed payment of interest. Since then, JSPL has been under pressure to sell some of its assets to raise cash.

The firm, which only has steel and power businesses along with some mining assets, had little option but to look for a buyer for its power assets since the bulk of its earnings come from the steel segment.

The power plant deal will help JSPL improve liquidity, working capital and help reduce debt, JSPL chief executive Ravi Uppal told Mint over the phone on Wednesday. Uppal said that he is confident of securing fuel supply and finding long-term PPAs within the two-year timeline.

Uppal denied the deal was a bailout.

JSPL went through an elaborate process to find a buyer for the project, and the offer from JSW Energy was the best from a list of 12 potential buyers, Uppal said while adding that the company looked at offers from other potential buyers from Singapore, India,Japan, China and Malaysia.

The markets didn’t respond well to the fineprint of the deal, although analysts say it is a reasonable one.

JSPL shares closed the trading session at Rs.66.60 per share, a fall of 3.48% compared to its previous close, while the benchmark BSE Sensex closed 0.5% lower at 25,101.73 points. The company on Wednesday also reported its sixth straight quarterly net loss due to higher fuel and finance cost.

Analysts, however, say that the deal brings some immediate relief with the promise of more in the future.

“The deal will bring some relief with the payment of Rs.500 crore. In the long term, given the asset is largely debt-free, whatever cash flows the company can manage out of it through its sale would help it retire debt or meet other requirements for its remaining and power and steel assets,”said Sudhir Kumar, assistant general manager at Credit Analysis & Research Ltd (CARE).

JSPL may also find it easier to raise fresh debt with the sale agreement in place.

“Banks will recognize this (the sale) and provide flexibility in lending,” said Rakesh Arora, managing director at brokerage Macquarie Capital Securities India Pvt. Ltd.

Uppal of JSPL acknowledged that using the sale agreement to secure fresh funds is an option. “The (two-year) period will provide cushion for JSPL to meet condition precedents of securing fuel supply and long-term PPAs,” he added.

More asset sales ahead?

The sale of the Chhattisgarh power plant may need to be followed up with more asset sales, said analysts.

“The deal will help, but a sustained relief is possible only through further asset monetization and improvement in steel demand and realizations,” said Kumar from CARE.

As of March 2016, total consolidated debt for JSPL was at Rs.43,806.28 crore.

The company has publicly stated that it will look at other ways to unlock cash.

JSPL is in discussions with steel companies in China, South Korea, Japan and Europe to form joint ventures in certain sectors of steel, Uppal had told Mint in a 10 March interview.

“With the sale of this 1,000 MW power asset, planned stake sales in its rolling mills and with steel prices firming up the company should be able to manage its financial performance well. There is a slight mismatch which can be addressed,” Arora of Macquarie said.

JSPL has an installed steel manufacturing capacity of 4.75 million tonnes per annum. After the transaction with JSW Energy, JSPL will be left with about 2,400 MW of power capacity.

What’s in it for JSW Energy?

For JSW Energy, the deal will help increase its installed power generation capacity to 5,531 MW and get closer to its target of having 10,000 MW in installed capacity by 2020.

“This (the acquisition) will diversify JSW Energy’s presence towards the eastern region of the country, and in Chhattisgarh which is rich in coal reserves. The transaction is structured to be value-accretive to the shareholders of the company immediately upon consummation,” JSW Energy said in the statement.

The project is debt-free and JSW Energy will fund the buyout with a combination of debt and internal accruals, JSW Energy’s Sagar said at the press meet.

The company is also working on two other power sector deals.

In September 2015, Jaiprakash Power signed a so-called binding memorandum of understanding (MoU) with JSW Energy for the sale of its 500 MW Bina thermal power plant in Madhya Pradesh. That deal is yet to move forward.

In July, JSW Energy had also signed a non-binding MoU with iron producer Monnet Ispat and Energy Ltd to acquire its unit Monnet Power Co. Ltd, which is developing two coal-fired thermal power plants with total capacity of 1,050 MW in Odisha. The deal hasn’t moved so far.