JSW Energy Limited (533148) Earnings Call Transcript & Summary

Sure. So the total equity, like you just mentioned is about INR 3,000 crores? And I take a time line up to FY '25?

Yes.

And what is the current cash balance?

It was about INR 811 crores at the end of September.

Okay. And you're generating close to INR 2,000 crores of almost free cash flows now for every year? I mean, minus the CapEx that is planned up to FY '25, these 3 projects. So over next 4 years, INR 8,000 crores will be generated, you already have INR 800 crores to close to INR 9,000 crores against which the equity requirement is INR 3,000 crores. The debt-to-equity level is very manageable, as you've just mentioned, and it will remain manageable even after executing these 3 projects, assuming you don't take on anything else. Then in that case, what is your thought process about payouts? You have, in the past, given INR 1 dividend payouts of INR 170 crores, INR 180 odd crores. But now as we can see, the cash flow generation is among us. And against that, the planned CapEx is almost 1/3 of that.

So as I mentioned is that we are aspiring to be a 10 gigawatt company in the next 5 years' time frame. That means we are going to undertake number of other projects in order to grow our balance sheet. And also, I mentioned that our deleveraging cycle has been seeing the bottom. So we will be leveling up the balance sheet. We continue to follow a dividend distribution policy wherein we have been making a payout of 20% of the retained profit every year. And so Board always takes a call in case there is a -- there are the opportunities, then we try to deploy the cash for the growth opportunity. Otherwise, we can try and increase the payoff also. So Board evaluates time to time. They have been the time where the payoff has been more than 20%. And -- but the way I see it is that there may be the chances of aggressive growth opportunities in time to come because we are seeing the rationalities coming in the competitive environment and renewable space. And we have built enough capabilities, and we are undertaking these projects. And so we see that we will be able to achieve a growth of another 5 gigawatt in next 5-year time frame.

Yes. And I also had a question on our holding on JSW Steel shares. What is the costing of the share, which on FY '20 is about INR 1,000 crores holding? What is the current fair value holding that is sitting on the balance sheet?

So we have close to 7 crore shares. So at the current market price, it will be north of INR 2,200 crores. And so that's the position.

Yes. So I mean, is there a thought process of liquidating this and using this cash either for your own CapEx or giving it back to shareholders? We have had our IPO in 2010 at INR 100. The stock has barely in that price in these 10 years higher than that. And even today, it substantially remains below that. We've had an impeccable track record in terms of execution and running a tight ship. But when it comes through distribution, I think there, we need to probably look into more.

Certainly, I take your point, and we will deliberate at the Board as and when an opportunity comes. And also at the same time, close to about, correct me if I'm wrong, 44% of promoter shareholding remains less. Of course, less is not a problem. The place is getting released of late. But that is crust of the problem where in terms of return to shareholders, it's probably -- there is some thought, I think that you guys should give into.

So Sujit, if I may come in here, we are actually representing the entity days of the energy limited. It will not be appropriate for us to comment on the holding structure at the promoter entity level because that is a completely different team, which is responsible for that. However, having said that, what we have -- can talk about as this, and this is also evident from the public disclosures in terms of stock exchange filings that there has been a change in the structure of the financing mode. And therefore, if you look at the period October to December 2019, there was a significant reduction in pledges that happened because of the change in the financing structure at the promoter entity level. But beyond that, we would not really have visibility on that side.

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

Just one point here. I mean, when I look at the other comprehensive income, there is a INR 634 crore profit from items not classified in P&L. Can you elaborate what is that?

That is, Abishek, basically because of the movement in JSW Steel shares, so the MTM impact on the OCI, yes.

Okay. Got it. And secondly, I just want to understand the availability of any short-term contracts or tie-ups that we have done for Vijayanagar and Ratnagiri? And any ramp-up plans that are available now in -- for JSW Ispat where we will be signing the contracts?

So look at it this way that as far as the merchant market remains very benign. And the tariffs are not at all viable. However, in terms of the increase in the long-term PPA portfolio from 81%, we see 2, 3 events, which will be crystallizing it. One is the increase in the capacity by JSW Steel at Dolby, which we are expecting by end of this financial year will get completed. So that will happen. Also, like, for example, acquisition by Asian Color by JSW Steel will be increasing the PPA portfolio by another 14 megawatt. And so there is a plan by JSW Steel to increase the capacity at Vijayanagar at some point of time in medium-term. As and when that happens, then that will be also improving the long-term PPA portfolio. Another opportunity is the 5,000 megawatt RTC blended tender along with renewable energy, which the new guidelines have been issued 2 days ago. So we are expecting by end of this current financial year the tender should be concluded. So that is another possibility to increase the long-term PPA portfolio. Other than that, in the spot merchant market, the current environment is quite challenging. For the -- at least for the current financial year, I don't see an improvement in the trend in the merchant prices. Yes, going forward, next year, probably there will be the improvement in the merchant prices. And therefore, we can see that the merchant volume may pick up next financial year.

I think that's helpful. Just one point here. In terms of Telangana, we had a short term contract. Have you booked any revenues or volumes to them or that is expired now?

That is expired.

And there was a compensation which was required from the previous quarters because they picked up lesser than the contracted value?

So that's under discussion, and we are confident that we will be getting that. And as a prudent practice, we have not recognized in our incoming statement so far. But we are quite confident that we will be getting that.

Thank you. The next question is from the line of Anuj Upadhyay from Emkay Global Financial Services.

Sir, need one clarification. A few days back, there was a media article which mentioned that the company is trying to set up almost 14 gigawatt of renewable capacity in and around Karnataka and Tamil Nadu. You mentioned about this 810 megawatts to be set up against in Tamil Nadu. So are we in -- or in advanced stage of discussions with Karnataka to set up another 500, 600-megawatt of capacity?

Look at this way that we have been talking about that we are building a long-term portfolio of the renewable resources. And when we talk about resources means that we have to acquire particular locations where we can either set up the solar parks or wind turbines. And so we are building that portfolio in various states. And that's -- that becomes handy with us as and when we are bidding with SECI or we are also evaluating the group captive opportunities because JSW Group is a large power consumer. Within the group also, the total power consumption is in the region of 2,300 megawatts. Based on the various RPO obligations, the JSW Group itself will be requiring close to 1,000 to 1,200 megawatt of the renewable power in time to come. So that is also another opportunity. In addition to that, there is a big portfolio we want to build. If you look at historically, the way the renewable business was being done, the wind turbine OEM manufacturers, they used to build the portfolio of the sites where there is a potential to install the builder lines. And they used to supply on an EPC basis to the investors who were working primarily as the financial investors whereas the JSW Energy approach has been that we have been doing a very efficient project execution and at a very low cost, low capital cost. Therefore, JSW Energy has been acquiring such potential sites, both for solar as well as wind for past 12 to 18 months time frame. And we have built quite a bit of portfolio. Thereby, as and when we made a bid, we will be able to execute those projects well in time at a very low cost. So there are various locations, which we are trying to identify and build in various states, including Karnataka.

Right, sir. One small clarification, sir, on the thing you said just now. Even Vijayanagar was trying to park some part of its untied capacity at a group level. So in spite of meeting that RPO obligation, which you mentioned through the upcoming renewable capacity, would still there be some kind of room to park our Vijayanagar capacities out there? Or more or less, it would be now replaced by the renewable capacities going ahead?

Both are independent and mutually exclusive because RPO obligation is you have to meet that obligation. And second part is that if you are trying to replace some of your capacity by replacing the thermal power with renewable power, both are mutually exclusive requirements. So -- and what I mentioned about the group captive point of view for the RPO obligation that is a regulatory requirement. And building a portfolio is -- can be used for any purpose, either for the SECI tender or any other distribution company or within the group.

Fair point, sir. Lastly, sir, on the recent challenges, which we have seen in the wind sector as such. Last year, we have seen -- I mean, year-to-date, if we say, past 12 months, there has been almost 35% to 40% reduction in the wind power generation. And the developers are citing the reason because of the change in some geographical conditions and that's across the country, which are now leading to a very low level of PLF across the wind station. So I mean, basically, sir, how we plan to counter such kind of challenges? Is the size itself would be sufficient enough, which we are eyeing to meet these challenges? Or there could be some technology upgradation or advancement which we'll be using to tackle the situation? Because both -- I mean, as per our discussion with few of the industry players, solar generally is a more -- I mean, less volatile compared to wind. And we have now ventured into a renewable and that too in a huge margin for the wind place? So that's why there was some curiosity to ask this question.

I want to clarify one part is the variation is happening for the developers who are working on a P50 and P75 CUF.But if you are working on a P90 CUF, there is no variation. So we are very, very prudent and conservative in our approach. As and when then we are looking at any wind or solar resources, we are looking at the resources -- or the -- by resources, I mean, the location, where there is a sufficient data is available with the multiple wind mark or further solar radiation. And for both solar as well as wind, we are always taking P90 CUF, not P50 or P75. Therefore, we do not expect any kind of negative surprises in any of the year, both for wind and solar.

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

Sir, just one question on the receivables front. You've done, I would say, decile on controlling the price in receivables. So if you could just throw some color as to -- from the state perspective, where are we getting this money from? And how do we plan -- or how do you see ending the full year with?

So one is that there is a seasonality in our billing cycle because if you look at that quarter 1 and quarter 2 because of our hydro, the seasonality picture also come in. And -- but if you -- if I can say that, that the current financial year and the last financial year was very, very challenging for the industry as a whole. And -- but during this pandemic time, the overall risk -- overdue situation for the industry per se has deteriorated substantially wherein as compared to the last year, where the total overdue for the sector was in the range of INR 70,000 crores to INR 80,000 in September 2019. And as of now, it is around INR 140,000 crore, our receivables have come down, which demonstrate the quality of our PPA as well as the kind of power mix, which we are having. So that is what -- we believe that in the worst of the cycle, we could reduce our receivables because we are in the bottom quartile of the purchase basket for the respective discounts. And therefore, we have been able to do it in a very, very efficient way. Going forward, we see this trajectory to continue because the incremental PPAs, which we are doing or the capacity which we are building, that is in renewable state. That is also a very low-cost power. And therefore, we are very, very confident that this trajectory will continue.

Okay. Sir, the current receivable amount, how much of this would be overdue?

Thank you for patiently waiting. We have the management reconnected. The next question is from the line of Sarvesh Gupta from Maximal Capital.

If you can give some color on the profile of your cost of debt and is it coming down? And what is the sort of expectation going forward? So that is my first question. And secondly, you commented that on the 810-megawatt project, you would be targeting mid-teen sort of IRR. So these are like 15% sort of project IRR pretax is what you are saying? And is that the number that should be the base case for the remaining part of the 5 gigawatt, 6 gigawatt growth that you are targeting over the 3, 4 years as well?

Yes. Typically, we look at that kind of a hurdle rate whenever we are undertaking the projects. And -- but historically, we have been doing better than that. If you look at even the -- our free cash flow yield on our existing entire portfolio -- because sometimes I have been observing also, people have been calculating our return on net worth straight away by dividing the profit after tax with the net worth and calculating the return on net worth, but they do not look at that our -- in spite of the network with the lot of component, which is INR 2,200 crores is coming from the steel shares and JPVL shares, which are not part of our profit after tax. If you calculate for next 20 years, which is the life of our balanced PPN, FCF yield, it will be north of 16%, 17% on our entire consolidated balance sheet. That means whatever projects we have undertaken so far in our 4.5 gigawatt capacity, we have been earning more than 16%, 17% equity IRR. And that's how we look at it. And then whatever we will be building the projects for another 5, 6 gigawatts, the hurdle rate will be close to 15% rate. And -- but all in all, we will be doing better than that because of our prudent O&M practices. And also our healthier balance sheet, we have been doing in a lot of financial engineering. And that's what is reflected in our cost of capital also. If you look at our cost -- average cost of debt today is 8.33%, which we see will be -- there is a further scope to have a downward trajectory and in spite of a challenging business environment for a power sector in India. So going forward, with the reliability space, there will be a lot of opportunities to tap different kind of a capital market globally because for thermal projects, there is limited avenues to source capital. And for renewable space such limitations are not there. Therefore, given our track record and also our balance sheet, we believe we will be able to do that. Also, it will be mindful to note that a lot of incremental improvement in our equity IRR has been coming from our past track record of very low operations and maintenance costs, which has been coming down year-on-year in spite of the wage inflation. So that's how we look at it.

And Sarvesh, if I may add to what Prashant mentioned on the weighted average cost of debt. To put things into perspective, at the end of March, this was 9.1% plus. So almost 80 basis point reduction on the overall portfolio has already played out in the last 6 months. So while we do expect a few more resets on some of the portfolios going forward, so some modest increase is still possible going forward, yes. But I just wanted to put it in the right context.

Just one clarification. The 16%, 17% FCFE number that you were quoting, was that pretax or post tax?

No, post tax. And if you take the NPV for the balance 50 -- 18, 19 years, FCFE also, on the network you will be coming out with similar kind of a number. So that's what also you should, see then the typical ROE calculation what you do. And if you really do in a like-to-like basis or an operating income basis, then you should eliminate shares which is owned by the company, which is a part of the net of close to INR 2,200 crores, INR 2,300 crores. If you eliminate that, then that will be further going up by another 2%, 3%.

Thank you. As there are no further questions, on behalf of JSW Energy and Axis Capital Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

Thank you.

Thank you, Aisha.

Thank you.