JSW Energy Limited (533148) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the JSW Energy Q1 FY '21 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Modi from ICICI Securities Limited. Thank you, and over to you, sir.

Thank you, Faizan. Good evening, ladies and gentlemen. On behalf of ICICI Securities, I welcome you all for the JSW Energy Q1 FY '21 Earnings Conference Call. From the company, we have Mr. Pritesh Vinay, Vice President, Group Investor Relations and Capital Markets. The call will be initiated with a brief overview by the management, followed by the Q&A session. Over to you, Pritesh.

Thank you, Rahul. A very good evening to everyone. On behalf of JSW Energy, we welcome you to the results earnings conference call for the first quarter results. I'm sure you have had the chance to look at the results, the press release and the presentation, which is already uploaded on the website and sent to the stock exchanges. We have with us today the management team represented by Mr. Prashant Jain, the Joint Managing Director and CEO of JSW Energy; and Mr. Jyoti Kumar Agarwal, Director of Finance. We will start with a few minutes of opening remarks by Prashant, and we can then open the floor for Q&A. With that, over to Prashant.

Thank you, Pritesh. Good evening, ladies and gentlemen. During the quarter, we saw the power demand contracted by 16% because of lockdown, which was announced by the government. And slowly, it was easing up, and that's what reflected in the monthly trend in power demand also. In the month of April, the power demand contracted by 23%, which moderated to 15% contraction in the month of May. And in June, it was negative 10%. In July, till date, we have seen the provisional data is talking about negative growth of 3.5%. This trend demonstrates that the economy is coming back and lockdown is easing up. And we are expecting that by October, we may be seeing a positive growth in power demand. As of now, we are experiencing that only the restaurant, the commercial malls, theaters and gyms, these have not yet come back. But with the issuance of the new guidelines, we believe that this demand is also going to come back, and we will be seeing a positive to neutral demand growth in the month of October. All India basis, on generation side also, there was 16% contraction. But the contraction was seen in thermal space, which was negative 22.8% whereas all other segments have shown positive growth because they enjoy the must-run status. The all India thermal PLF in the quarter was also 46.6% as compared to the previous year of 62.8%, but this also has seen the moderation month-on-month. In the month of April, the thermal PLF had seen a low of 42.4%, which went up to 47.9% in May. And in June, it improved to 49.5%. And in July also, it has seen the further improvement. So as the demand pickup takes place, the thermal PLF is also going to see a better trend. Coming to the company, the total generation also reflected the power demand contraction of 16%. So our generation at 4.9 billion units was down by 16% year-on-year. Our thermal generation was down by 18% and hydro generation was down by 13%, primarily because of lower water availability. If you see the breakup of our sales, our short-term sales was down by 83%, and our long-term sales was down only 6%. But the interesting fact what if you see during the lockdown, which demonstrates the kind of the quality of our earnings and PPAs, our DISCOM sales had gone up during the quarter by 8%, whereas the group captive sales was down by 20%. If we come to the revenue side, our revenue was down 23% this quarter, but if you remove the one-off, which -- for the year before, then the revenue was also like-to-like basis was down only 16%. But our EBITDA was down 4%, and this is what shows the resilience due to the long-term PPAs and less dependence on the merchant power. As I mentioned last quarter also that 95% of our EBITDA is not dependent, is totally on the long-term PPA. Only 5% of our EBITDA is dependent on merchant power sales. That's why our EBITDA was down only negative 4%. And of course, our O&M costs also during the quarter was lower, as we have been reducing our O&M cost year-on-year basis. This year also our O&M cost was lower, and we expect to continue that journey going forward. In line with our deleveraging of our balance sheet, our interest cost has been going down. And this quarter also it was down 11%, and our PBT was lower by 1% year-on-year. And if you look at the net debt of the company, it was down by INR 450 crores at INR 8,493 crore at the end of the quarter. Our deleveraging is continuing. And then as we are speaking, our net debt is lower than INR 8,000 crores. So that is what also reflects that we have been improving our receivable position as well as we are deleveraging our balance sheet. Our weighted average debt cost was 8.44% in the quarter, which has been benefited by reduction in the MCLR and reset of our debt. At the end of the quarter, we have ended our net debt-to-equity at 0.7x versus 0.77x:1 in the month of March. And our net debt-to-EBITDA has gone down to 2.65 as compared to 2.76 in March. As regards to receivable, as I mentioned, that our receivable situation has been improving. As we are speaking, our receivable is down 22% as compared to June 2019 receivable, and 20% lower than the March receivable. And we expect that this trajectory will be further improving as and when the disbursement of the INR 90,000 crore is done by PFC/REC to the distribution company. And this will also demonstrate the quality of our PPA, as we have been harping upon that our power is low power cost as well as it is in the bottom quartile for the respective DISCOM. So 2 qualitative indicator, as I mentioned, that during the pandemic situation also our power scheduling had gone up by 8% last quarter and our receivable situation has improved. As regards to GMR Kamalanga transaction, both the companies have mutually agreed to terminate the SPA with no cost to either party. Ind-Barath is still in process before NCLT. The progress has been pretty slow because of the COVID-19. We will continue to update as the progress takes place. There is another development. We have come out as a comprehensive sustainability policy in our initiatives to improve our compliance in -- under ESG. JSW Energy has come out with new 16 policies and specific targets for climate change, water conservation, waste management, air emission for 2030. And also, we have pledged to achieve a carbon neutrality by 2050. With this, I conclude my opening remarks and open the forum for the question and answer.

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

Yes. Sir, two questions primarily. First, on...

Mr. Kumar, sorry to interrupt you. Sir, the audio is not clear from your line. Hello, Mr. Kumar, please go ahead with your question. As there is no response from the current participant, I have muted the line. We'll take the next question from the line of Pavan Ahluwalia from Laburnum Capital.

Yes. You mentioned that your receivables were down about 20%. Could you give us a sense of what they are at as a percentage of revenue? And also I noticed on the footnote, you said that some of the customers were trying to declare force majeure, but the company leaned on the Ministry of Power's guidance that force majeure's not applicable. Now obviously, we know that the Ministry of Power would very much like DISCOMs to be responsible and honor their PPAs, but the fiscal situation of states from the financial situation of DISCOMs is such that very often the intentions of the Ministry of Power are not translated into the reality of people dealing with DISCOMs. What percentage of the revenue we booked this quarter is sort of disputed in this manner where we're billing them, but the customer is saying this is force majeure, so I don't want to pay?

Thank you for your question. We do not have any disputed billing during the quarter or the previous quarters with respect to the COVID-19. And it was a standard notice, which was sent by various DISCOMs to various generators. We had also received 1 or 2 such notices, and for which we have replied in a -- based on various legal position. However, in due course of time, each distribution companies have started making payment to us without any dispute to the billing. And that's what we have -- it has reflected. And just to give you the color also, during the quarter whatever we have done the billing, we have received more than INR 304 -- or INR 350 crores more than what we have billed. So that has reduced the past overdues only and so there is no dispute with regards to any bills. And in terms of the number of days or as a percentage of revenue, Jyoti?

So the debtors at current point of time would be sub 20% of our annualized revenues.

Got it.

And debtors include lot of amount, which is not due.

The next question is from the line of Mohit Kumar from IDFC Securities.

Sir, 2 questions, sir. First is on Ind-Barath. Sir, what is the time line expected to the acquisition to be complete? And are there any hurdles for this transaction to not go through?

Thank you, Mohit. Given the COVID-19 situation, the hearings have not been taking place. So ideally, in past, we have been experiencing that typically at NCLT, it takes 180 days to 365 days to complete the proceedings and then settle the issue. But because of COVID-19, this has become a challenge. So I cannot give any kind of a color that what could be the time line. Earlier, we were thinking that there was a visibility to conclude this approval process by October. But given the COVID-19 situation, I don't have that kind of a color at this point of time. So -- but it will be certainly get delayed. So probably end of this financial year or after that.

Okay, sir. Secondly, sir, how do you say demand has panned out in July for our power plant? Have the PLFs improved over the scarcity in Vijayanagar?

So it has been reflecting the country-wide demand. So basically, as I have been mentioning that our contraction in generation was primarily from the group captive customers because of the lockdown, they had to stop their operations, and then they are now back to normal. However, PLF to distribution companies is -- there is a growth. And in case of hydro also, the water flow has been good in the current quarter, in the month of July. And then it is showing an improving trend as compared to the last year. So the current quarter, the generation will -- should be better. In July also, as I mentioned, the contraction has been moderated for the country and the similar kind of a situation will be happening for JSW Energy.

Sir, lastly, on the cash flow uses, how -- given that we don't have any requirement to use our cash for any of the projects for FY '21, especially, what you would do with this surplus cash in this particular year?

So typically, we have been maintaining a policy either for repayment of debt or sharing it with the shareholders and -- as a dividend. So that's what we have been maintaining as our policy. So we will continue to follow that.

Is there any equity requirement anywhere for this particular financial year?

So there is -- there could be a requirement depending upon how we ramp up the Kutehr project, but it wouldn't be a meaningful one. We obviously have a plan to venture into the renewable space, but it's a bit early right now. I don't see a real capital outlay on that front in this year. And obviously, if Ind-Barath happens sooner than what current visibility is, then there will be a requirement there. Other than these, I don't see any equity requirement this year. There's going to be some CapEx that we will have to do every year as maintaining CapEx. Beyond that, there's not too much of a funding requirement here.

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

Sir, congrats on good set of results despite challenging environment. We are perplexed to see on the O&M side, how you have been able to manage and cut cost so significantly. So from INR 170-odd crores last year or maybe INR 155 crores as of Q4, it's brought down to INR 85 crores. So can you spell out what has led to that reduction?

Probably, there are -- quarter-on-quarter comparison is not right. So we have been reducing our O&M cost. It is a single digit kind of a reduction, which is acceptable kind of a number. So we have been taking various kinds of measures to improve our efficiencies. I can say that our heat rates are consistently improving, fuel efficiencies have been consistently going up, auxiliary power consumption have been going down. And on manpower productivity index, also, we have been improving. And we have been undertaking various digital initiatives. So last 3 years, we have reduced our O&M cost on an absolute basis, close to 15%, 15.5%. And this year also you can reasonably expect that it can be 4% to 6% kind of the reduction in the O&M cost as a whole. But this trend may not continue because last year, there may be some one-off or some particular shutdown because of which the CapEx or the O&M cost could be higher in a particular quarter. But year-on-year, yes, it will be a lower trajectory. And we have been -- we are the lowest cost -- O&M cost power producers in the country, and we take pride in that. And then we believe that we will further reduce it and optimize it.

Sir, that is appreciated, the initiatives. What I'm trying to understand is this INR 85 crores is like lowest since 2011 in any of the quarters? And post-2011, you have added many assets as well, including the acquisition of the hydro asset. So is there any one-off component? Or should we take this number as a going concern or some costs have been saved due to the lockdown, people are not traveling or some maintenance has been pushed back? Or is there anything to that effect also we should take as one-off?

So I think -- this is Jyoti here. Prashant did allude to it. It's a combination of 3 things. One is overall optimization of the cost budget. And post COVID-19, we sort of 0 based the cost project and worked with the team to sort of see what the new normal cost base would be. And carrying on some of the optimization efforts over the last 2, 3 years, a lot of the benefits you're seeing is because of that. The second component is a large component, but there is some component of expenditure in the O&M, which has been deferred because of the COVID-19 situation they have not been implemented. For example, CSR expenditure. Typically, we will do a certain amount of CSR expenditure in the first quarter. This year, because of the situation, we could not do. This is also a component, not a large one. Third, there is a little bit of a one-off. In the first quarter of the last year, there was about a INR 25 crore one-off O&M expenditure, which we have not done this particular quarter and we'll not do going forward. So that's a permanent sort of a reduction. So combination of these 3 things is what we're seeing as O&M expenditure. Also, you must appreciate that this time we have not done -- we've not been able to sell too much power on the short term market and there is a POC component, which is taken as part of O&M, the transmission charges. So -- point of connect charges. So those are not coming in because we have not sold on the exchange. So some of it also explains it. Plus, I would encourage you to take all the nonfuel cost items as 1 category because the way we look at O&M is all of it is combined in 1 category. And then you see that it's consolidated level. The reduction is approximately about INR 50 crores, INR 48 crores to be exact. And roughly half of it, I would say, is because of permanent measures that we have taken over the years and will be sustaining going forward.

Okay. Great. That's helpful to understand. Sir, secondly, I mean, we are at close to 90% PPA now. What part is remaining? And would be -- what would be the path to say, 100% PPA, especially with these JSW steel expansions coming up over this year and next year. If you can spell out that, it will be great to understand and modulate.

So Vijay cover -- total capacity-wise, 83% is the PPA tied up and 17% is the open capacity. However, as we have been mentioning that our 95% EBITDA is coming primarily from the long-term PPA and only 5% is coming from the merchant, so that's how you need to look at it. And we have been continuously looking at how do we improve our PPA basket. But during the current financial year, I don't see a visibility that we will be able to improve this basket. But yes, next year and going forward, certainly, we will strive to improve PPA portfolio. So we can expect that in next 2 to 3 years' time frame, we will try to do -- try to tie up the entire capacity, which is available because some of it will get tied up with the increase in the power requirement by our group company as and when their extension projects are getting completed. And some of it will be through some new hybrid tenders, which are being planned, and we believe that we should be able to participate in those tenders. And if we are -- if there are the competitive tariffs, then we will be able to certainly tie up in a thermal and renewable hybrid tender as and when that is done because recently government of -- recently SECI has announced that 5,000 megawatt thermal renewable RTC tender. And if that materializes probability are very high that we could secure some capacity over there. So in over a period of 2, 3 years' time frame, there is certainly a visibility to tie up that balance 17%.

Right. Do we have a plan in place for this? Because our current projects are high cost funds. I mean, the variable cost is high given that it is far away from the port and using imported coal. So Vijayanagar is the only one where we have a bigger capacity untied. So I mean when we participate in renewable tender, do we have a game plan in place? How do we reduce cost? Can we get domestic linkage to reduce it? Or how do we do that?

Given the kind of the competitiveness, which renewable power is offering and also the oil prices environment, it is being reflected the energy prices from the thermal coal is also moderating continuously. And then imported coal is also as competitive as domestic coal for a landlocked power plant situated in Karnataka or Maharashtra. So we feel that there is a good competitiveness, which JSW Energy will be offering in -- at these locations. At the same time, you should also remember that these are fully depreciated power plants where the fixed costs are very low as well as our efficiencies in O&M cost offers a very substantial competitiveness as compared to other thermal power plants, which are located somewhere else. At the same time, Karnataka is also having a huge renewable potential. So given all these kind of strategic advantages, we believe JSW Energy will offer a very competitive proposition.

Okay. Okay. Great. And are we now ready to spell out our renewable plan, given that we have set aside the thermal acquisition? In the last quarter, you mentioned that you'll be coming out with a plan -- detailed plan. So are we ready to talk about it? And what are the -- what is the thought process? How do we create value out of the cash flow that we are -- huge cash flow that we are generating today? Your stock is at 0.6x book and your, obviously, the coal assets are not being valued as they used to be getting valued historically. So any game plan that is decided -- strategy that is decided for renewables?

So the valuation, it's a question you have to answer, but I can answer about the growth side is we have been talking about that in next 3 to 5 years' time frame, we will be a 10-gigawatt company, which we were spelling out earlier as a mix of thermal and renewable opportunity. But I think now we will achieve that with the renewable space. And as we explained last time that we have been working on acquiring the sites, and we have been very aggressively working on that. And very soon, we will be putting our competitive bids in the future tenders as and when opportunities are coming in our way. And for us, the most important thing has been a quality growth over the growth. And that's where we have been very, very mindful, and we will -- we see that the current environment offers the good opportunities, which can give attractive shareholder return. So you will be seeing us active in the future tenders.

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

First question is on the PFC/REC package of INR 900 billion to DISCOM. What have you heard in terms of the progress so far? I mean our sense is that on the overall overdue payables of DISCOMs to GENCOs and TRANSCOs? The number as of June is more in the ballpark of INR 120,000 crores, INR 125,000 crores. So it's a lot in excess of what the INR 90,000 crore package stands for. And even their progress has been slow because state governments are shying from giving guarantees to their -- on the loans to the DISCOMs.

So it has been different for different DISCOM. I have been following up some of the DISCOMs where we are supplying power. So for example, Maharashtra, they have given guarantee, they have got disbursement. UP, they have got disbursement. And Telangana, they have got disbursement. So some of the DISCOMs, which we are supplying power, they are -- they've got. And Haryana, Punjab, I think, they don't have any overdue. And it's only for our DISCOMs -- only Rajasthan has been pending DISCOM, where government guarantee is not yet in place. But rest of the other DISCOMs where we supply power, everywhere, either the disbursement is -- has taken place or they don't need money. And even from the Rajasthan, our dues have been substantially reducing, as I mentioned, that -- just to give you the color that whatever is our July billing, we have got double the amount. And in June also, probably 25%, 30% more. Because 1 color I want to give you is that in the month of April, there was no collection taking place for distribution companies. So real collection has happened in the month of June and July for payments, which were due in -- for March, April and May. So the -- lot of liquidity has happened with the distribution companies in the month of June and July, and that's what has reflected. And whatever our collections have improved and receivables have gone down in the month of June and July, majority are without any disbursement by PFC/REC. So it's primarily from their own intrinsic cash flows. So once these cash flow improves, then our receivables will further go down. But as I mentioned, always the quality of PPA is very, very important, and that's what reflects in the scheduling of power as well as payment or the receivable cycle. And that's what we have experienced that during the last quarter, our scheduling went up by 8% in spite of contraction in demand and our receivables have gone down.

That's very good to hear. Right. Just on this particular point, would it be right to say that your overdue receivables as of June quarter end are then almost negligible?

No, not that.

So how does the overdue receivable [indiscernible] from March to June in absolute terms?

So in March -- from March 2020 as we are speaking on 31st of July, it is down by -- total debtors are down by 20%.

Right. And within that overdue debtors?

So it includes disputable amount also, it includes not due also and overdues also. So yes, 33% approximately is overdue.

So Sumit, the way to look at it is the overall debtor situation has actually improved significantly for us across the board. But for disputed, which you would appreciate that will only get resolution once the matter is adjudicated, right? So if you exclude that, both the normal receivables as well as the overall receivables, there has been a significant pickup in the collections. And as Prashant is saying, overall, our receivables are down by -- as high as 20%. Overdue is actually down even further. So that's the way to look at it. And this is despite one of the key state for us, which is Rajasthan, we have almost 25% of our capacity there. Not getting any benefit under the Atmanirbhar scheme. There is a plan to get some money there once the government guarantee is in place, and we expect further realization of our overdue receivables from there. So overall, I think it's been a very heartening progress on the receivables as far as JSW Energy is concerned.

And that's why our total net debt has gone down significantly because of this corrections because when these receivables have gone down and then we have reduced our net debt by close to INR 900 crores in 4 months' time frame.

Sure. And just as a follow-up. I heard that your overdue receivables is about 1/3 of your gross receivables as of end of July. Is that right? And what was that percentage as of March?

No, no. What I was saying was the overdue receivables have come down by 33%...

Okay, come down by 33%?

That's what I said. Okay?

The next question is from the line of Anuj Upadhyay from Emkay Global.

Sir, firstly, on the receivables. You mentioned that the receivals are down about 20-odd percent during the quarter. So it has more to do with the prompt payment or I would say like normal payment, which they have been doing pre-COVID level in our case, or it has more to do with the fall in overall generation itself? Hello?

It's primarily last 2 months, their cash flow situation has improved dramatically. And as I mentioned, during the quarter, our sales to distribution company have gone up by 8%. So our generation did not go down as far as the DISCOMs are concerned. Generation to DISCOM has gone up, I'm talking about thermal generation. Thermal, it has been -- and what about the hydro. Hydro was down by 13% during the quarter. So it is a must-run status. So whatever we produce, we have supplied to the distribution company. Thermal sales went up by 8% during the quarter. So our generation was not down. It is their cash flow situation improved and also they have been paying first to the low-cost power producers. So that's where we got the advantage.

Okay. And going ahead, sir, you also mentioned about the short-term tender. So do we see, I mean, DISCOMs across the country or largely to the states where we are offering our power, are they adopting to any measures so as to procure more from the short-term market and bring down their overall power procurement cost as a measure to curb whatever the losses they have incurred in the Q1. So if that is the case, then probably we may see a lot of short-term tenders at an aggressive rate coming up. So do we sense anything happening in the subsequent quarters of, say, starting Q2?

We have not seen any short-term tender coming in the market for last 6 months' time frame. And until the situation normalizes, I don't think you will be seeing anything. So I don't see in the next 6 months' time frame also any short-term tender, which will be coming up in the market. So situation is going to get normalized only in next 6 months for the short term market. Right now, whatever the merchant power sales you are seeing in the exchange is due to the fact that some of the plants which are not able to maintain the technical minimum because their power is not being scheduled by the DISCOM because only the high cost power plant are facing those kind of difficulties and their power is not being scheduled by the DISCOMs, so they are selling in order to maintain the technical minimum, the power in exchange markets. Secondly, lot of high-cost renewable power was also not scheduled in the last quarter, which was also finding its way to the exchange. And thirdly, you saw a lot of this hydropower because in South as well as West, you saw a very good early monsoon because of which excess hydropower in the untied capacity found its way in the merchant market. If you look at the top sellers, there will be 1 -- you will see 1 leading hydro power producer who does not have tie up, and he is the biggest seller in the market and the merchant in exchange. And that is what power is driving the lower power cost in the merchant market.

Okay. And your outlook on the renewable, sir. I mean, like you mentioned that probably we have pledged ourselves to achieve carbon neutrality. I sense [Foreign Language] probably now with GMR deal falling out, so renewable would be something where we are eyeing our big leap or growth going ahead. And sensing that currently, I mean, the government has been imposing few stringency to import equipment from the China especially. So under such circumstances, how do we plan or manage to eye something big on the renewable space, especially in case of solar.

So any quality initiative, which is being taken by government of India, it will be having a global impact for all project developers in the country. So that will reflect in the competitive bids. So it won't be unique for any specific company. And this is the direction in which government is moving. At the same time, there is a lot of investment which is taking place in the country to manufacture a lot of equipment in India. So we will be evaluating all that but my experience has also been that whenever any kind of a duty which has been imposed, the similar kind of a reduction in the panel prices have been offered by the suppliers. So ultimately, because of imposition of the duty, it has not really matched the kind of a technological advancement, which has happened by way of improvement in the efficiency of solar panel and increase in the size of the solar panel. So that is what has been really at a faster pace than anything else. So the cost of power from renewable sources has been seeing a downward trajectory. So that will have a very big bearing. Second thing is, if you might have observed that the interest that the interest cost environment has been really benign. And in case of renewable power, there is no fuel cost. It's only the fixed cost. So if interest costs are going down, the power tariff will subsequently, you will see that they will be seeing the downward trajectory. So that's why renewable sources will be offering a very competitive power tariff in time to come, and it will continue to offer.

Okay. And lastly, sir, are we looking out on the -- as a developer perspective, in case of solar or we are open for the EPC, or say, equipment manufacturing segment as well?

No, we are concentrating only on power generation, so we are not looking at either the EPC or manufacturing or distribution side.

The next question is from the line of Aniket Mittal from Motilal Oswal.

Yes. Sir, my first question is on the finance cost. If I look at the presentation, there's been a sharp reduction in your average cost of debt. Sir, could you just throw some light as to what you [indiscernible] overall finance cost for the finance rate to be for the full year? And do you see any possible reduction in this like going forward?

Yes. So this is a function of 2 things. One is some of the MCLRs have been reset over this quarter. And so this finance cost is reflecting that. Also, when we do prepayments of debt, we proactively sort of try and prepay the more higher cost debt to bring down the average finance cost. So that has been the reason why we've seen a downward trajectory. Now in terms of the prognosis, there are some more loans, which are coming for reset in August to September and October. So you will continue to see a downward trajectory of this average finance cost over the rest of the year.

Okay. And just on that -- not actually, could you let me know what's the number of the acceptances at the end of June? Because I think the net debt number does not include -- the receivables number does not, sorry, include the acceptances. Can you let me know that?