GMR Kamalanga Energy Limited (533148) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the analyst call hosted by JSW Energy Limited. We have with us the senior management of JSW Energy, represented by Mr. Prashant Jain, Joint Managing Director and CEO; Mr. Sharad Mahendra, Director and COO; and Mr. Jyoti Kumar Agarwal, Director of Finance. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Prashant Jain [indiscernible]. Over to you, sir.

Thank you. Good evening, ladies and gentlemen. Today, JSW Energy has signed share purchase agreement with GMR Energy for acquiring 100% stake in their subsidiary, GMR Kamalanga Energy Limited, which is owning and operating 1,050-megawatt thermal power plant in Orissa. This asset fits in our stated strategy. It is a textbook case wherein the asset is having close to 85% of its capacity tied up for a long-term PPA, diversified both PPA portfolio with PPAs with Orissa, Haryana and Bihar. It operates a pit-head plant with a dedicated railway line from the nearest railway station, which ensures low variable cost, which makes this power to be dispatched on priority in merit order dispatch and also minimize receivable or offtake risks. The -- out of the overall total power PPAs, the average fixed cost is -- which will be realized in the current financial year is INR 1.61, and average variable cost will be to the tune of INR 1.50 to INR 1.60, including the coal pass-through, which means the average power cost will be at the CTU periphery between INR 3.10 to INR 3.20, which makes it in the bottom quartile of the purchase basket for the respective DISCOMs. That's why it fits in our stated strategy. It also has 150-megawatt of the open capacity, which offers us the further upside potential, which requires new FSAs close to the quantum of 850 -- between 800,000 to 850,000 tons per year, out of which 400,000 tons FSA has been secured in recent SHAKTI auctions 2 weeks ago. This asset is also -- has been able to lock 150-megawatt of the capacity as a L1 basket bidder in recent Pilot II Scheme. This acquisition will enable us to expand our geographical footprint in Eastern region and also help us to diversify our asset portfolio across fuel sources and off-take arrangements. If we look at the transaction value, the deal has been done at an enterprise value of INR 5,321 crores. The asset is having a target, outstanding debt of INR 3,951 crore and balance consideration of INR 1,370 crores will be payable, of which INR 755 crore will be payable upfront subjected to the working capital adjustment, primarily by means of debt and internal accruals and balance INR 615 crores will be kept as a holdback amount, which will be payable on certain milestones and shall also be paid or funded through debt and internal accruals. This asset will be having a base EBITDA of close to INR 900 crores, with a upside potential of another INR 150 crores. At INR 900 crore base EBITDA, the asset is at -- valued at 5.9x EV/EBITDA multiple. There are other various potential upside, which JSW Energy will be able to bring in. One is reduction in O&M cost, and second is tying up the untied capacity and tying up the fuel supply linkage because when you buy coal in the open merchant market or forward e-auction or spot auctions, your fuel price is higher. Therefore, the dark spread is lower. But once you tie up a long-term PPA as well as a FSA for that, your fuel cost goes down, which is in this case is close to INR 1.55 to INR 1.60. And if you are selling power at a -- even at a low cost at CTU bus, then your dark spread improves. There is also a upside opportunity available for certain provision which is being made on a regular basis on account of environment management fund as well as the electricity duty, which is paid on the auxiliary power consumption or the units sold outside Orissa. That amount is close to INR 60 crores per year, which is not considered in this base case EBITDA, which is after making that provision. This amount is accruing as a free cash flow, and we see that these are the industry-wide dispute, which is on a very strong footing and at some point of time, they will be decided in the favor of the thermal generators. So that EBITDA can be recognized at that point of time. But on a free cash flow basis, that will be also coming up. With this, I conclude my opening remarks, and we are happy to take any questions and answers if you are having. Thank you.

[Operator Instructions] The first question is from the line of Mohit Kumar from IDFC Securities.

Yes. Can you hear me?

Yes, please.

Yes. Congratulation on the acquisition of the asset at an attractive valuation. Sir, my first question, is that the -- you said that INR 6.2 billion is contingent on achieving certain milestones. Can you please quantify those milestones?

Jyoti, you would like to?

Yes. So look, the key milestone here is a particular dispute on the target asset with one of the contractor. And the holdback amount as well as the deferred consideration is basically linked to that. There are some time-based payments also which are there. But ultimately, if the dispute is not resolved with the passing of time, then those time-based milestones also get deferred till the time the dispute is resolved. This is the main one. Then there are some other contingent receivable and contingent payable, which are basically linked to various tariff orders as well as true-up petitions which are lined up, which will happen over the course of the next 18 to 24 months. But those are the minor components. The major one is the particular dispute with the project contractor, and the payment is to be made only after the dispute is settled with the contractor. And based on the nature of settlement, the amount will also be decided.

So what is the disputed amount with the contractor?

So the -- it's a complicated dispute, to be honest. And based on how the dispute is settled, the amount could range anywhere between the amount that we are holding back to a little bit higher or to a little bit lower as well. The way the SPA is constructed is that the entire liability on account of that contracted clean is actually to the seller's account other than a certain amount up to INR 315 crore which is to the buyer's account. So what that means is that if the liability is up to INR 315 crores, then the buyer pays. If it is higher than INR 315 crores, then the seller actually is responsible for the liability. Now the amount of holdback that you can see is actually INR 615 crores, so which comprises of INR 315 crores, which, anyways, we are responsible as buyers, plus another deferred consideration component of INR 300 crores. This is basically to ensure that there is enough holdback amount available should the dispute amount finally rise higher than the INR 315 crores, right? So depending upon how the dispute is actually settled, the amount, in our opinion, should be around the INR 500 crore, INR 600 crore mark, which is equal to the amount that we have held back.

But our purchase consideration -- our EV in all situation remains limited to INR 5,321 crores.

The next question is from the line of Sumit Kishore from JPMorgan.

My first question is, in relation to the historical performance of Kamalanga, so in FY '19, Kamalanga's EBITDA was INR 7.4 billion and 9-month FY '20 has been reported at about INR 5.6 billion. So basically, there appears to be a bit of pickup in FY '21 to reach your base case EBITDA of INR 9 billion. Could you help us reconcile the same?

So Sumit, a good question. If you look at our base case EBITDA estimate for FY '21, you will see that there is a contribution from open capacity, which is almost INR 125 crore. Now you would know that GMR is quite stretched at the moment really. It will not have the ability to raise debt at any of their company levels other than probably the airport business. And for this asset also, they are constrained to have working capital line, for which they are not able to buy coal to be able to feed through to the merchant capacity. So this entire merchant capacity accrues to 170-, 175-megawatt is currently lying idle. On top of it, even the contracted capacity, they are not able to run it completely, primarily because of scarcity of working capital. So the delta, as you can see, from a, let's say, average EBITDA of about INR 750 crores, INR 775 crores, which they are anyways achieving, just this INR 120 crores, INR 130 crores of open capacity takes you to the INR 900 crores. So the base cases are all pretty robust. It does not depend on any sort of leaps of faith which are stretched leaps of faith. Essentially, we believe that in our hands, the working capital lines will be there. We will be able to get those lines revised and raise the right kind of money to be able to buy-in and normalize the working capital. And as Prashant was mentioning, this is a low-variable cost plant because of being close to the coal mining region, right? So even taking coal under the auction route should not lead to your coal cost higher than INR 2. It will actually be lower than INR 2. And you can see that even in these sort of pretty average and sort of downbeat times, the average merchant tariff is around the INR 3 mark. So about INR 1 dark spread on the open capacity is a very reasonable assumption. And we believe that will be the major part of the swing. If you look at the potential EBITDA part, right, which is the INR 1,050 crore mark, here, again, there are 2 elements primarily. One is, in our opinion, a low-hanging fruit. The plant today has an O&M cost structure, which is not aligned with, let's say, the JSW O&M cost structure. So we believe that we can easily shave off close to INR 2 lakh, INR 2.5 lakh per megawatt, maybe about INR 25 crores, INR 50 crores from the O&M. This, we believe, should happen very, very quickly, maybe 2 to 4 months into the -- into running the project. The other one is the PPA-linked upside. We believe that because the variable cost under linkage-based coal is even lower, close to INR 1.50, it should be possible to tie up either a short-term or long-term PPA with a dark spread of close to INR 1.75 to INR 2, and so that would be another INR 125 crore upside, making it to a potential of INR 1,050 crores. Now this INR 125 crores could take a little bit of time. But we believe that the INR 900 crore base plus maybe a INR 25 crore to INR 50 crore upside should be possible 6 months into owning the asset.

Sure. Just a couple of follow-ups on what you said. So if I back calculate and look at the contribution you have from open capacity, it appears that on the 150-odd megawatts, you have taken a fairly high plant load factor, I mean, upwards of 90% or so?

Yes, it's actually 170-megawatt and...

Yes, after auxiliary. Yes.

Yes, yes, exactly. So we have taken 90% PLF for the merchant fees. And on top of it, we've taken about 7% off. So the net PLF will be close to 84%, 85%. I think that's not a very unreasonable assumption given what we are doing in some of the other plants where we are able to sell under merchant, yes.

Okay. And the provision for ongoing disputes, this is like a onetime item and will stop in FY '22 or how does it...

So basically, it's a -- it's not a onetime item until the dispute is settled. That provision will continue to happen. But we will be having that free cash available with us until that time. And we are having a clear visibility because the way we look at it, this is specific to Orissa state. And you are talking about that electricity duty is to be payable on the auxiliary power consumption for the unit which are exported out of the Orissa state. Whereas the state, if you look at the -- it is on the consumption point and power generators are not consuming electricity. So that's the point number one. Second thing is there is an environment management fund which has been created and under the act, central government can only put this kind of cess or duties, which Orissa state has, levied came out with a notification that for every power generation, there has to be a close to INR 0.06 per unit for -- to be payable for any electricity which is sold outside the state. With -- both the cases are specific to Orissa state, we believe that these are the ultra-virus cases. This is applicable for all the generators which are present in the state of Orissa and at various stage of litigation. We believe these cases will be settled in the favor of the generators. But as a prudent accounting practices, we will be making the -- we will continue to make the provision. But this money is not deposited with the state authority. So this is a free cash available. So the INR 60 crore is available for repayment of debt or the other various purposes for the period. But we believe that there is a strong case that will be coming in favor of the power generators.

So the project has made how much cumulative provision against this dispute so far? And has there been any cash outflow on account of that?

No, there is a stay granted on this particular dispute. So they have made a regular provision every year and -- in the balance sheet. And they are not depositing any money.

They're not depositing any money. Sure. Sir, just last question. You mentioned in your presentation some quantum of past disputed receivables net of contingent liabilities. So what is A and what is B, so what is this amount coming to?

There is a visibility what we are seeing that it will be a net positive receivable. And at this point of time, in our enterprise value, we have not considered because there are various receivables towards the coal pass-through billing. Recent Act 10 orders have settled all these cases in favor of GMR Kamalanga. And based on the receivables and payables, there will be a positive cash flow towards the GMR Kamalanga asset, which will accrue to JSW Energy because both the things belong to JSW Energy pursuant to the transaction. So there is a potential upside for us, whereby this enterprise value of INR 5,321 crore will go down and our EV/EBITDA multiple will further go down.

The next question is from the line of Abhishek Puri from Axis Capital.

Sir, thanks for the opportunity and congratulations for closing this deal. Just quickly on the amount that you mentioned that has been provided for environmental management fund, is that INR 50 crores, you said?

So it is every year different. For future, we are talking about it will be to the tune of INR 60 crores because it is depending upon the units which are exported out of the Orissa state. So for the past years, it has been provided in the range of INR 40 crores to INR 55 crores every year because depending upon the kind of export. On a normative availability basis and normative PLF basis, what we have calculated, this amount will be close to the tune of INR 50 crore per year next year -- next financial year onwards when it is under the management of JSW Energy because the asset will be running full. That's the quantification.

So in INR 900 crores, this INR 60 crores is not included?

That's right. And also, the potential upside also this INR 60 crore is not included.

Right. Okay. INR 150 crores also does not include this INR 60 crores?

That's right.

Okay. In terms of the total amount that we have paid INR 5,321 crores that we have agreed for, does this include the amount to be spent on environmental management for NOx and SOx solutions?

No, that will be over and above that. But then based on that, we will be getting the change in law.

Okay. In terms of the debt that is transferred, so INR 3,951 crores is what you mentioned, right?

Yes.

Is the asset on the...

This is the term debt on the target asset.

Okay. And how much is the working capital debt in this?

So it's a moving number. The final number will be at the time of closing. But it is, on an average, about INR 175 crore to INR 200 crore, but that will be the working capital adjustment to be made, like from the balance sheet amount.

Okay. Okay. So that INR 175 crores will be deducted from this INR 5,321 crores?

It will be a part of the working capital adjustment. So the net working capital will have a negative INR 175 crores if there is a -- the working capital debt is that amount.

Right. Okay. And in terms of the PPA that have been mentioned in the presentation, sir, 263-megawatt, Odisha; Haryana, 334; and Bihar, 283. These are the net PPA numbers or gross PPA numbers?

These are gross.

These are gross numbers.

Okay. Because I remember reading in one of the CERC filing or petition that the Haryana PPA was 350-megawatt, right, or that has been changed?

So these are the correct number what we have given you.

334 is the gross PPA?

Yes.

And just one more point. So the Odisha one had 2 separate contracts, right? So 263-megawatt was at -- or the 25% of the capacity was at a cost-plus kind of a basis. And balance, was there any quantity on variable cost also in this PPA?

No. No. If you look at our presentation, we have given the fixed cost also, and how we are going to get. And so all these PPAs are actually 2 parts. This Odisha 1 and Haryana and Bihar are Case 1 PPA. And balance life of PPA is 19 years, so.

Right. Why I'm just trying to clarify because some of the other projects had this issue. So I was just trying to be sure.

So in this asset, it's not like that.

Okay. Understood. And lastly, just one more point on the funding mix you said will be from internal accruals and debt. Any breakup that you can provide on this?

Well, it will depend upon the final amount. As you can see that the target debt is completely taken over. Now against the INR 755 crore that we need to pay as balance consideration upfront, there will be a net working capital adjustment. Our sense is that it could be in the range of between INR 150 crores to INR 250 crores. So the net consideration that we have to pay upfront from an equity point of view will be around INR 500 crores, INR 550 crores, right? So I do have enough capability to be able to fund this either through my cash equival or through debt taken at the top core. So we'll look at that when the closing happens and take a call at that point of time.

Right. And lastly, in terms of the holdback amount of INR 650 crores. What is the long short -- long stop time line here, I mean, in terms of resolution of this contractor amount as well as the balance receivable and payable amount?

It's totally ring-fenced in terms of the performance. There are certain expected time lines. But if those time lines are not met, then this holdback amount will continue.

So the time line is 6 months, 1 year? I mean -- and what happens if, say, 1 year has passed?

As you know, these are the legal disputes, it may take longer time. That's why it will continue until the disputes are settled or we get a complete confidence and reasonability, we will continue to hold back this amount.

Okay, okay. So there is no fixed time line as such?

Yes, it is -- the time line is that dispute has to be resolved to our satisfaction.

Okay. And if it is not resolved to the satisfaction here and supposedly, the amount which has to be paid to the contractor is say INR 415 crores. So do you pay INR 315 crores or -- and the seller pays INR 100 crores, the balance on that?

See, our liability is limited to INR 315 crores for that particular contractor liability. That's why we said that our enterprise value is constant and limited at INR 5,321 crores.

Fair enough.

And any other liabilities which are coming on that account is to be payable by GEL. And for that comfort itself, we have increased the holdback amount by additional INR 300 crores so that in case there is anything happening more than that, we are having at least that much of holdback amount and which we'll continue to hold back until the dispute is settled.

So if I understand this correctly, INR 305 crore is the holdback amount that you will continue until the dispute is resolved and the balance amount INR 315-odd crores, which is remaining, will have to be paid on a time basis?

No.

Let me explain, Abhishek. The INR 315 crore is an explicit holdback amount against the liability. The additional INR 300 crores has 2, 3 components. Some of it is time-based, right, some of it is contingency-based. But in any case, this amount, even if the time milestone has been achieved, if the contractor settlement has not happened, we will continue to hold this. So for all practical purposes, the weakest link in the chain, as they say, is the contractor settlement. And we will hold back this entire INR 615 crores till the settlement with the contractor happens, irrespective of whether the time milestone has been reached or not. So for example, if, let us say, in 6 months of time, we -- the contractor claim is settled, right, then some portion of the INR 300 crores, which is time-based may not payable, it will be payable only when the time milestone arrives. But if the time milestone has been achieved but the contractor settlement has not happened, we will not pay that amount till the time the settlement with the contractor takes place. Yes? I hope it's clear.

Very clear, very clear. Absolutely clear on this. And just as a -- just to complete the loop here. If the dispute does not get resolved and keeps on dragging in the court for, say, 5 years' time, the amount will not be paid?

We continue to hold back.

The next question is from the line of Rahul Modi from ICICI Securities.

Sir, congratulations on the completion of the acquisition. Sir, just a couple of questions that I had. Firstly, with regard to the tariffs that you mentioned in the PPT, are these taking into account all the recurring change in laws and everything which was pending historically due to the cess and other things which had come in for coal and other things? So that is the final amount that will be billable?

It is the variable cost, if you're talking about. This is including the current change in law and SHAKTI DISCOM. However, the coal pass-through is not included into that. But as a thumb rule, I can just give you on an average, will be around INR 0.11, INR 0.12 you need to add for coal pass-through. Because coal pass-through is different for different year, but you can say reasonably between INR 0.11 to INR 0.13 will be the coal pass-through which will be there because that orders have not yet been implemented. They have recently come in, in the last 4 weeks' time.

Okay. So this will be regarding the imported coal usage or any other source?

Coal pass-through is from any source.

Any source, yes.