JSW Energy Limited (533148) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the JSW Limited Q3 FY '20 Earnings Conference Call hosted by SBICAP Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Santosh Hiredesai from SBICAP Securities. Thank you, and over to you, sir.

Thanks, Faizan. I would like to thank the management of JSW Energy for giving us this opportunity to host the call. On behalf of SBICAP Securities, I extend a warm welcome to all the participants to JSW Energy's 3Q and 9-month FY '20 earnings call. I will now hand over the call to Mr. Pritesh Vinay, Head Investor Relations for JSW Group to take this forward. Over to you, and thank you.

Thank you, Santosh. A very good evening to all the participants. And on behalf of JSW Energy, I welcome all of you to the third quarter and 9-month fiscal 2020 results earnings call. We have with us today the management team of JSW Energy represented by Mr. Prashant Jain, Joint Managing Director; Mr. Sharad Mahendra, Director and COO; and Mr. Jyoti Agarwal, Director Finance. We will start with a few minutes of opening remarks by Prashant, and open the floor for Q&A after that. With that, over to Prashant.

Thank you, Pritesh. Good evening, ladies and gentlemen. During the quarter gone by, we saw the power demand fell 6.2% year-on-year that was primarily due to poor economic activity and higher base. In the October this year, we saw the demand fell by 13%. And same year in 2019, power demand went up by 12%. But in November and December, we saw this got moderated. In November, power demand fell 4.4%; in December 0.5%. In January, what we have got the data for last -- first 22 days for generation, the generation is up by 1.7%. So we have a reason to believe that power demand has seen its worst and it is recovering, and it is going to come back on track. During the quarter, the thermal generation, or the PLF, went down by 6.1% year-on-year. Whereas on the -- in case of hydro, it was 18.4% higher. And in case of renewable, the generation was up by 8.4%. During the quarter, the net capacity addition was 5.5 gigawatt. With this, we saw 8.7 gigawatt of capacity addition in renewable space in first 9 months, which is more than the last year, whole last year. And total capacity addition during the first 9 months was 12.7 gigawatt. With this, the total capacity in the country is at 368 gigawatt. Merchant prices have further moderated during the quarter, and it was down 34% year-on-year at INR 2.83. And for the 9 months, the merchant price are at INR 3.09, down 22% year-on-year. API 4 Index has gone down 21% year-on-year, but it was up 23% quarter-on-quarter. During the quarter, average API 4 Index price was $74 -- $75. In the recent budget, we saw 2 structural positives for the power sector. One was for 15% reduced corporate tax, power generation has been included, thereby it's a structural positive for the companies who are planning to enter or building renewable capacities, which will come in onstream before March 2023, they will get benefited. And second was the smart metering prepaid meter concept, which will improve the cash flows of distribution companies and which would be helpful to reduce the receivable issue going forward. For the company, during the quarter, net generation was down 10% year-on-year at 4.6 billion units. And that was primarily due to the lower merchant sales as well as the backdown by the distribution companies. However, the deemed PLF for the thermal consolidated for the company for the quarter 3 was at 72% as compared to 75% last year. This reflects that the predictability of the cash flow and -- is improving substantially for the JSW Energy in spite of the challenging environment. For the first 9 months, the deemed PLF for the thermal assets is 73% as compared to the last year's 74%. During the quarter, our revenue was down 19%, EBITDA was down 13% year-on-year at INR 706 crores, interest was down 11% due to the repayment and PBT was down 4%. At the end of the quarter, our net debt stood at INR 9,530 crores, reflected in debt-to-equity at 0.76x is to 1. For the quarter, we generated a cash profit of close to INR 500 crores. And first 9 months, we generated in excess of INR 1,700 crores. I would like to touch upon 3, things which have happened during the quarter. One is the JPVL restructuring. JSW Energy had INR 752 crores outstanding towards JPVL. Of that, INR 352 crores was converted into equity at phase value. At the time of the conversion, the market value was INR 62 crores, which has since gone up, but that was considered at INR 62 crores in the books at the time of the conversion. Of the balance INR 400 crores, INR 120 crores has been converted into a debt, which will be what -- a priority debt in a waterfall mechanism after repayment of mandatory 10% of the sustainable debt of JPVL. They will be paying this INR 120 crores in a priority after the normal repayment or to the lenders. Balance INR 280 crores was written off by JSW Energy. For that, JPVL waived off its claim for INR 477 crores of the contingent receivable pursuant to the share purchase agreement signed between the 2 companies. Of this INR 477 crores of the contingent receivable, INR 300 crores represents towards the operating of the capacity for which a substantial progress has happened so far. There was a Independent Expert Committee, which was appointed by Ministry of Water Resources, who -- which has given its recommendation in the favor of the project. We are seeing a good visibility to get that approval in due course of time. The second part is the INR 177 crores of the contingent receivable. We are having a good visibility for north of INR 100 crores pursuant to the true up, which is in process. And in next, 9- to 15-month time frame, that money will be received. So therefore, of that INR 280 crores write-off, we will be having a visibility of close to INR 400 crores plus INR 120 crores of the priority debt and balances 5% equity share at the time of the conversion value where its market value was INR 62 crores, whatever upside comes that -- or downside comes, that has to be borne by JSW Energy. Second thing is on the GMR Kamalanga. The talks are progressing very well, and it is in the advanced stage. We expect that in a couple of weeks' time, we should be in a position to sign share purchase agreement. And at that point of time, we will be disclosing the transaction details. But one more -- one thing which we want to highlight, our investment rationale has been further bolstered after the actual order, which has been received in the last quarter by the GMR Kamalanga for various coal pass-through recoveries, which will be an added advantage for us. And also for an untied capacity of 170 megawatt, new SHAKTI B3 linkage scheme has also come up and which will be going for auction later this week. So that will be further adding visibility to tie up the fuel linkage for untied capacity. Lastly about the Ind-Barath. Subsequent to our submission of resolution plan, which was recommended by CoC to NCLT, number of hearings have happened and it is in process. There are a number of petitions, which have been filed by various operational as well as financial creditors disputing the intercreditor allocation. And we were expecting earlier that the NCLT approval will come by 31st March 2020. Now we see that, that approval may get delayed by June or July. With this, I would like to conclude my remarks, and I would -- I open the forum for the discussion or questions. Thank you.

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

Sir, first question is on the -- we had a PPA, short-term PPA with Telangana. How is the offtake during the quarter and has the -- if not, has it improved during January?

No. I think Telangana has not taken -- given any schedule during the quarter. Whatever we supply the power was in quarter 2 to Telangana. Post that, they have not taken any power from the company. And I want to tell you is that under the PPA contract what we have signed with them, if Telangana is not taking power then they have to give the compensation at the rate of 20% of the tariff. And we have not recognized this money into our income. But given the past track record as well as our discussion with Telangana, we are confident that we will be recovering the compensation from Telangana.

Okay. And sir, how has been the offtake in January?

No. It's still no schedule from them. And we do not expect that schedule will be coming in the month of February and March also. So I think it will reflect only into the shift of the compensation from Telangana in due course.

Understood, sir. Second, sir, Ind-Barath committee of creditors you've approved or proposed long back, why there is so much delay?

Jyoti would like to take that question.

You know there are these usual litigation around the sharing of the proceeds between the various class of creditors. So the asseters have secured creditors with different varying degrees of security, and then there is a class of unsecured creditors. We have prescribed a certain sharing of the -- our resolution value, but we have left it open to the CoC to distribute it in any different way that they deem fit, which the CoC has agreed and taken a call. It's just that parties who felt that they have got less than their fair share have sort of moved IAs with the NCLT. The NCLT is hearing the various applications that have been filed, interim applications. There are some other issues also where one of the lenders have questioned the resolution value being lower than the liquidation value. And to that extent being a dissenting creditor, that lender wants to be paid based on liquidation value. So this is also one of the matters that is outstanding. There are 1 or 2 operational creditors who have also filed for recognition of their claims, which, in their opinion, has not been recognized. So there are about 4 or 5 of such IAs and the hearing is happening very slowly. I mean there is a gap of about 20, 25 days between 2 hearings. So we think that this plan of ours should take at least about 4 or 5 hearing before it sort of gets resolved. So we expect that maybe by the June quarter is when the NCLT resolution should happen. We have about 90 days after that to close the transaction. So this looks more like a September close for us.

Understood, sir. One last question, sir. There is a lot of tax-related items that have undergone changes in the current quarter. Is it possible to explain the rationale behind it?

Yes. So we have decided to not go for the new regime because it makes sense to continue in the old regime till the time our 80-IA benefits are available and our MAT credit can be utilized. Now because of that assessment, the deferred tax liabilities that we are carrying is excess to the extent of INR 165 crores because when we have exhausted all our benefits, then we'll switch to the new regime. So there's no time correction that will happen because the regime will change. And based on our internal assessment, that period will be, I think, in 2034, '35. And by that time, we feel a minimum of INR 165 crores of excess deferred tax liabilities would exist. So we have reversed that. So that is the major part of the reversal of the INR 192 crores that you are seeing on the tax side. In addition to this, for JPVL, we had earlier made a provision. And as some of you may know, provisions are not tax deductible. So now we have actually written off INR 570 crores out of the provision that we have made from a tax point of view. So this year, we are not going to be paying any MAT because that write-off is actually set off-able as a deductible. And for the first 2 quarters, we had provisioned for about INR 39 crores of MAT, which also we have reversed in this quarter. So these are the 2 main reasons why you're seeing a huge reversal on the tax side.

The next question is from the line of Apoorva Bahadur from Jefferies.

Couple of questions. Sir, firstly, on this JPVL loan restructuring, so what exactly led to this restructuring? Because anyways, if I believe, we have largely provided for it?

No. We had provided for it, but that was more an accounting entry. We were continuing to be discussing with the company for resolution of the payable from their side. And as part of an overall restructuring there, we entered into an agreement, whereby we are supposed to get INR 120 crores of debt on priority basis plus we've got about 5% equity and we have agreed to sort of set off any receivable or payable under the SPA for buying the Karcham-Wangtoo assets. So because of that agreement, we had to now account for whatever we have agreed, and that's why we are now accounting for it whereby we have reversed about INR 177 crores of payables to them. We have recognized the shares, we have recognized the outstanding dues from them and we have written back the provision to the extent not required. So the reason why we're doing it is because now there is a resolution of the outstanding through an agreement between us and JPVL, which has also been blessed by the other lenders.

See, look at this way that we were an unsecured financial creditor to JPVL and lenders were approving the restructuring of JPVL and which would have not been possible without final agreement with the JSW Energy. And that is why this restructuring has happened.

Okay. Sir, secondly, please pardon my ignorance over here, but the conversion of this INR 352 crores of equity at phase value, was it necessary to convert it at phase value itself? Or could this had been there at market value? I mean what's the regulation over here?

So as per the regulation, we could have only converted it at the phase value. But nevertheless, we need to look at that, in any case, we have got at the time of conversion, $0.15 to $1. So look at -- out of INR 752 crores totally, which was outstanding against which, now, as I told you about, there is a visibility of INR 520 crores towards the contingent receivable as well as the priority debt plus we are having INR 62 crores of the carrying value in our books, which, at the time of conversion. So you were talking about out of INR 752 crores, there is a visibility of close to INR 620-odd crores. That's the kind of the way you have to look at it whereas we had already provided INR 574 crores into our books. So as we are recognized, we realize all this money. We will be taking them into the P&L. So the income will be coming in future as and when we all recognize all this money. So there is an upside only, which will be coming from the financial point of view.

Right. Okay. And this conversion -- this equity value will not have to be mark-to-market, right?

No. It will have to be mark-to-market, but the movement post-recognition will flow through OCI and not through the main P&L.

P&L, okay. Got it, sir. Sir, lastly, just one more question, and this is on your -- the decline in your revenue. So is that completely justified by lower short-term sales or is there anything else?

Both, lower short-term sales as well as the variable cost, the fuel prices.

The next question is from the line of Atul Tiwari from Citigroup.

Sir, you referred to this independent committee giving some kind of approval for operating of capacity worth INR 300 crores. What this is exactly? And what is the INR 300 crores amount? Could you throw some light on that?

So INR 300 crores is the amount, which was payable by JSW Energy to JPVL pursuant to the share purchase agreement, which we signed in 2015. So as I mentioned that when we have written off INR 280 crores for that amount, JPVL has waived off all its receivable rights from the JSW Energy pursuant to the share purchase agreement. And there were 2 amounts, 1 was operating of the project for which INR 300 crores was earmarked, another was INR 177 crores contingent receivable pursuant to the true up as well as the fixed cost order, which is pending before CERC. Of that, INR 300 crores is amount for the operating for which there was an independent committee was constituted and that independent committee has given the report in our favor. So in due course now, we should be getting that operating done.

So what I meant to ask that post this favorable report by independent committee, what happens to the generation levels in the project? Does it go up? And if yes, how much and how much incremental EBITDA that could give to you?

So the project capacity will go up from 1,000 megawatts to 1,091 megawatts, so the 9% project capacity will go up. And accordingly that capacity is available to tie up either the new PPA or to sell in the merchant market, whatever we deem fit.

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

So on this previous question, this capacity increase for Karcham, is there any CERC approval also required after this CWC report or...

No. After CWC report, the CEA has to approve it. And CERC has already passed the order that once the CEA approved it, then we can come back to the CERC for further determination. But in any case, we will be going to CERC after we sign any PPA. In case we are not signing a PPA and we want to operate the capacity into the merchant market, we need not to go to CERC. But if we tie up this capacity with any distribution company for that any -- additional 91 megawatts, we will have to go to CERC.

Right. Okay. Secondly, on this Telangana short-term PPA, could you tentatively let us know what could be the compensation amount for the entire quarter that we have let go? And what is the rate? What is the PLF, at which that would have been decided? Any tentative number should we fine.

It is INR 0.99 per unit.

INR 0.99 is the compensation. And this is at what PLF?

Compensation. For the 75% of the quantum.

75% quantum. Okay. Great. And third, if you can guide us in terms of, for the coming summer season, are there any contracts that we have participated in? Have we tied up anything?

So now the Pilot 2 Scheme (sic) [ Pilot Scheme-II ] is again coming for bidding. So that's one thing which we are looking at it. Second is, in any case, for Ratnagiri, we have been signing various short-term contracts. And if you see that, our all units are running full in spite of the lower merchant prices. So that is primarily because we have been entering into various short-term contracts with various parties within the State of Maharashtra, and that strategy has been successful so far for the year. And we have booked over power for up to March 2020. And now we are entering into the discussion with those parties for the short-term contracts in -- for 2020, '21. And with the increase in the capacity for JSW steel during the financial year 2021, the long-term PPA portfolio may increase. But we have a clear visibility as far as the Ratnagiri is concerned, we will be running all 4 units and with a reasonably decent PLF. However, for Vijayanagar, we are totally dependent upon success of Pilot 2 Scheme (sic) [ Pilot Scheme-II ] or any other scenario where we are able to sell power into the Southern Discoms. Otherwise, for Vijayanagar, the visibility is poor.

[Operator Instructions] The next question is from the line of Manish Gupta from Solidarity Investment Advisors.

Sir, I have 2 questions. One is what is your debt repayment in FY 2021 and '22 per year?

Yes. For the next year, which is 2021, our scheduled debt repayment would be to the tune of about INR 1,400 crores. And thereafter, it will be INR 1,100 crores. But then these repayments, they have a mechanism to sort of rollover by refinancing them from the same lender. So that mechanism is available. But, yes, the scheduled repayment is to the tune of about INR 1,400 crores for the next year and about INR 1,100 crores thereafter.

Okay. Second question is that recently there's been a lot of stuff about ESG-related risk to investing with fund managers saying they're not going to invest in companies with coal assets so on and so forth. Now given that climate risk is becoming a real risk and a lot of -- even though some of the assets that we are acquiring are, I would imagine, fairly attractively priced, how do you think about your future foray into thermal assets in the light of risks around climate change and the fact that, that could have some impact on the multiple of your company?

Yes. I'd like to -- see, the business growth decision as well as the business decision based on the return matrices, not on the valuation matrices. This is how we have been looking at. However, we believe very strongly that directionally the industry is moving towards renewable because of 2 things: One is, there is a technological shift which has decisively happen in favor of renewable; and second is the economic viability from the renewable sources is very, very attractive, is at par at thermal, in some cases, it is better than the thermal power. Therefore, JSW Energy is now concentrating in building the renewable capabilities. And as we mentioned last quarter also that now we are building this capability and then now we are in a process of building the renewable, both in wind as well as solar for JSW Group as well as third parties. And for that, we have decided a strategy to acquire such sites where we can build these capabilities or capacities, which is in progress. And we are feeling that out -- of our stated 10 gigawatts of growth strategy, 2 gigawatts, which has come up from the announced plan from Kamalanga, Ind-Barath and Kutehr. Balance 3.5 gigawatts will be primarily coming in next 3 to 4 years' time frame from renewable sources. So we generally believe that renewable is the future and more and more growth will be coming only from the renewable sources, both organically as well as inorganically.

The next question is from the line of Dhruv Muchhal from HDFC Asset Management.

Sir, just to understand the Karcham one to -- the capacity increase to 1,091, you know just to understand it correctly, the generation of the plant will not change because anyways it is running at the optimum capacity. It is just the energy, which is available for the PPA holders will decline and that gives you because that 91 is now available, you can sell it in probably merchant or sign PPAs for that, that understanding is correct?

No, no. Your understanding is wrong. See, there is a higher discharge of water which is available, which can enable the plant to run at 1,091 megawatt without overloading and with 10% overloading to 1,200 megawatts. Right now, plant is running at 1,000 megawatts at without overloading and during the monsoon time with a 10% overloading at 1,100 megawatts. So there is a total new additional energy generation for 91 megawatts without overloading and 100 megawatts with overloading during the entire financial year, which will be available capacity.