JSW Energy Limited (533148) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the JSW Energy Conference Call for acquisition of Renewable Portfolio of Mytrah Energy. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ashwin Bajaj. Thank you, and over to you, sir.

Yes. Thank you, operator, and good evening, everyone. Welcome to this call to discuss our acquisition of Mytrah Energy. This marks a significant leap forward in our renewable growth story. We have our CEO, Prashant Jain; and CFO, Pritesh Vinay, on the call here with us. So we'll have few remarks by Mr. Jain. Over to you.

Thank you, Ashwin. Thank you, ladies and gentlemen, for joining this call. It's a movement of pride and pleasure for JSW family to welcome Mytrah in our family, which is having a very good portfolio of assets of a large volume. This is being housed in 18 SPVs, which will be taken over by us, having a portfolio of 1,331 megawatt of wind and 422 megawatt of solar. With this acquisition, once we complete, which we target to do it in next 3 months' time frame, our operational renewable capacity will be 3,379 megawatt. And with our under construction of renewable capacity of 2,523 megawatt, which will be completed in the next 18 months' time frame, we will be achieving close to 9,100 megawatt of odd capacity by December 2023 or March 2024, of which 65% capacity will be renewable. With this clear visibility of more than 9,100 megawatt of operational capacity in next 15 to 18 months' time frame, we are on track to achieve our plan of 10 gigawatt ahead of the schedule. And with a lot of other activities going on, I am pretty confident that we will be achieving our 10-gigawatt landmark much earlier than what we have envisaged. There are a number of rationale of doing this transaction. One is that this is a large portfolio, which is operational, which comes with a very good talent pool, having an experience to build large capacities and having experience to operate them. Secondly, majority of its assets are adjacent to our assets where we are building. So there are various operational energies -- synergies, which we will be able to pool in. The third thing is that it offers us couple of very good opportunities, which I would like to explain to you. The transaction we did is a -- at the valuation of 6.4x normalized EV/EBITDA. The total enterprise value of the transaction is INR 11,934 crores, which is -- of which INR 9,100 crores is -- INR 9,134 crore is coming from long-term debt and INR 2,800 crore is coming from equity. And there are net working capital assets of INR 1,403 crore, which are comprising of INR 1,876 crore of the receivables and working capital debt of INR 473 crore. Adjusted for that, the enterprise value is INR 10,531 crore. The normalized EBITDA is INR 1,650 crore at P90 level. The current EBITDA is lower because of suboptimal operations because of certain working capital issues, certain technical problems could not be resolved, and right now, approximately 205 megawatt of the capacity is not operational, which will be made operational -- 80% of that 205 megawatt will be operational within 6 months. And current EBITDA is -- of the last financial year was INR 1,237 crores, which will be improved by INR 413 crore to INR 1,650 crore to achieve P90 generation level. Of this INR 413 crore, INR 353 crore will be coming purely by generation, that means by making this capacity up and running by putting money into the company and doing the maintenance and replacing some of the defective parts, whatever they are looking forward. And of this INR 353 crores, 60% -- 80% will be realized within 6 months' time frame. Right now, the current O&M cost is around INR 230 crore, which was for the last financial year, which translates to INR 13 lakh per megawatt, which will be optimized to INR 10 lakh per megawatt. So that means another INR 60 crore will be coming from O&M cost. So out of this INR 413 crore, close to 70%, 80% will be coming within 6 months and balance will be coming in next 12 months' time frame. And these are very, very basic interventions, which we will be doing, which we are having a very good long-standing proven fact record to achieve that. And this normalized EBITDA is at P90 levels, which is having a potential upside by having a higher generation. The second upside is also the [ asset ] gets approximately 3.5 million volume free carbon credit units credit, which is also not considered into the valuation what we are talking about. So the EBITDA is having a higher potential going forward. The second thing which I am looking at when I'm -- we have evaluated the transaction, if we are trying to build a similar kind of asset today, the wind assets are billed between INR 7 crore to INR 8 crore per megawatt, and solar are being built between INR 4.8 crore to INR 5.2 crore per megawatt. So the replacement cost at this current enterprise value is 5% to 10% higher. And on a P90 level, this asset will be generating INR 943 crore per gigawatt of EBITDA. Whereas in current bidding scenario, it is very tough to achieve even INR 800 crore per gigawatt kind of a number. So both on -- in terms of the EV/EBITDA multiple or replacement cost or EBITDA generation potential on the current assets, which you build in today's environment, the transaction is value accretive for us. And it gives us the access of the large portfolio where we can deploy our synergies. The third element in this particular asset is the transaction we are concluding effective 1st of April with balance sheet belonging to us, which means when we are talking about the receivables, which is INR 1,876 crore, of that around 45% to 50% is Andhra Pradesh and around 30% to 35% is from Telangana, and rest, all receivables are normal. As you know that Andhra Pradesh issue is also settled, and I'm happy to inform that Andhra Pradesh DISCOM has already informed Mytrah that they will be clearing all their dues within next 12 months' time frame and first installment will be all -- has also been received 2 days ago. And with the -- our deep expertise to manage the receivable, I am quite confident that out of this INR 2,800 crore of the equity check, which we need to write, majority will be realized by the receivable in next 12 months' time frame. So that gives us an enough opportunity on levering of the balance sheet with a minimal equity contribution. And furthermore levers available for positive upside on the EBITDA and incremental large capacity, we are very happy that this transaction will be value accretive on Day 1. Another thing which is very, very important is, even after completing this transaction and 2,500 megawatt of the under-construction capacity, which we are targeting to complete between next 15 to 18 months' time frame, our debt EBITDA will be lower than 4x on a completed basis. And our EBITDA per gigawatt will be higher than the industry now. And as you know that the industry is operating at 6.5 to 7x debt to EBITDA because of the very much nature of the business. We are having enough headroom to undertake no transactions as well as to grow the balance sheet organically. So that gives us enough room to accelerate our growth plan, which we have been talking about. This is all from my side, and we are going to take questions, if you are having any. Thank you.

[Operator Instructions] We have our first question from the line of Mohit Kumar from DAM Capital.

Congratulations on a very, very good acquisition. So my first question is on the Andhra Pradesh exposure. How much was the revenue for Andhra Pradesh in the last year FY '22 numbers? That's the first question.

So Mohit, we don't have discount-wise balance sheet, P&L, et cetera details. But just to help you how to think about it, the total portfolio of AP or from a capacity point of view is approximately 365 megawatt, yes. So about 365 megawatt of the 1,753 megawatt is what is impacted. If you look at Slide 10 of the presentation that we have put out, it has that number. So you will be able to -- because different capacities are operating at different [ EUF ] for reasons that Prashant mentioned, and therefore, we would not have that number with us readily, but you can make that. The other important thing to understand is this that of INR 1,876 crores of outstanding receivables at the end of March 2022, about 45% of that was from AP.

But I want to tell all the participants one part. First point is, this issue is settled. But let us imagine this issue is not settled because when we were working on this transaction. We were working on the -- on a hypothesis that issue may not get settled or it may take 2 years to 5 years to get settled. In that situation, we have already agreed with the lenders for a restructuring of the portfolio of Andhra Pradesh wherein there will be the receivable at INR 2.45 -- INR 2.04 will be...

43. INR 2.43.

INR 2.43. At INR 2.43, it will be restructured at 1.2x DSCR, and then there will be a sustainable debt component and nonsustainable debt component. So under both circumstances, it's a change of management and then the entire restructuring will be undertaken. So whether Andhra Pradesh issue is settle or not settled, we have planned accordingly.

Sir, my second question is, the revenue has been lower than the desired or optimal revenues for last 3 years, right? The -- consistently, the revenue has been below [ INR 16 billion ]. What gives you the confidence that this will be -- this can go up by [ INR 4 billion ] over next 6 to 8 months? That's the Herculean task, it looks like.

Yes, it may be a Herculean task for someone, but not for us. That's what our bread and butter because if machine is not having its [ pair ] and then I need to change a particular bearing, then it will be up and running because the raw material is free. And that's what we -- I explained that in last 3 years, because of the financial difficulties, thus enough money was not available and machines were becoming idle one by one because of capital. And in next 6 months' time frame, 80% of the capacity will be up and running. And if I am telling during this transaction because the balance sheet belongs to us from the 1st of April, already the initiatives have been undertaken. And I can say, out of the 205 megawatt, close to 35 megawatt will be up and running by September. So we have already undertaken those kind of initiatives, and it will be there.

Sir, lastly, sir, in the change scenario, what is the normalized working capital you believe this particular portfolio require?

The normal cycle is 2 months, and that we will take the next 12 to 14 months’ time frame to achieve it. All our businesses, we are operating with all kind of DISCOMs. Right now, we are supplying to 7 DISCOMs in our existing portfolios. We are operating within 55 to 60 days of the working capital, and that's what we believe that going forward, we will be operating. There could be certain seasonalities because of which it can sometimes go to 70, 80 days also, but not the kind of a situation that you are seeing in this.

So -- and Mohit, if I may add to that, what Prashant has said, in our base case as we're going through this particular portfolio, the base case that we have built in, as Prashant mentioned earlier, is this that for the first 15 to 18 months, we have assumed that for the AP and Telangana, there will be a 6-month receivable cycle. And therefore, the point Prashant was making that, that normalization is expected only after 15 to 18 months.

We have our next question from the line of Matías Vammalle from BlueBay Asset Management.

I'm really sorry, I just want to double check some figures because I couldn't hear very well. So the current EBITDA for these assets is around INR 16.5 billion. That's the one -- the first thing I'd like to double check. Secondly, can you remind me -- because again, I couldn't hear very well, how much debt is currently on the assets? And then lastly, with regards to Andhra Pradesh, what's the exposure of the assets? I mean what are the accounts receivables on the assets? And then you're saying that AP has informed Mytrah that they will be clearing all the past dues within the next 12 months. I know, obviously, there has been a court ruling. I wonder if you have had any more color from Mytrah or even Andhra Pradesh itself as to the liquidity to be clearing these past dues. Are they getting -- are they using some of the liquidity facilities that have become available from the government, from REC, from [indiscernible]? I'm just curious as to where that money is going to come from.

All right. So thank you for your question. Your number is correct. It is INR 16.5 billion normalized EBITDA. The long-term debt, which I explained, was INR 9,134 crores. Number three, what you asked about Andhra Pradesh, there is a court ruling towards that. There was a execution petition in which Andhra Pradesh DISCOM had informed to the court that they will clear all the dues within 12 months. Post that, they have given in writing to the Mytrah also that they will be clearing these dues, and they have got the funding from REC. The first installment came directly from REC on 6th of August this month. So it's already all set.

I'm very sorry. When will the first installment come in? And what was the amount? Sorry, I didn't mean to interrupt.

12-month installment. First installment has been received on 6th of August.

Okay. And what's the total amount of the past dues? I'm sorry.

Hello.

Yes. Yes. Hello. Can you hear me?

Yes. Matías, before you can ask your follow-on question, I just want to put 2 things also into perspective. For the financial year that ended in March 2022, the EBITDA that this particular asset generated was INR 12.37 billion. The INR 16.5 billion that Prashant said is the normalized EBITDA after the asset optimization and improvement interventions are done, yes?

Correct. Yes, and that's the delta exactly. Okay. Fantastic. 12 point for...

So the AP exposure, so at the end of March 2022 of the total INR 18.76 billion of outstanding receivables, about 45% of that was pertaining to the AP DISCOM, which from a capacity point of view is 365 megawatt out of 1,753, yes.

Fantastic. And so the fiscal '22, you said is INR 12.3 billion EBITDA.

Yes. Yes.

Okay. Yes, yes, I understand. And then you're going to be optimizing to try to get to the [ INR 16 billion ], and this also involved the completion. I mean part of the getting to the INR 16.5 billion, the completion of the currently nonoperational 205 megawatts, is that correct?

Yes. Yes. And primarily, these are the maintenance issues because they were certain spare parts, which are not available and that those needs to be capitalize. Those SPV should need to get the requisite money, and then they will be up and running immediately, and that's going to take only 6 months' time frame. And that's what we have also explained that of this, approximately 15%, 16% capacity will be up and running by next month end only.

We have a next question from the line of Puneet from HSBC.

It looks like a great acquisition. My first question is, for this 200-odd gigawatt which you have to make operational, what kind of issue...

200 megawatt.

Yes. Sorry, 200 megawatt that you have to make operational, what kind of issues are there currently? And are they -- if they're related to wind, which is OEM?

It's both related with the wind as well as solar, and they are related with OEM also and in terms of the machine spares also. So they've got the dispute between the OEM as well as Mytrah. Those have been settled and are under settlement, and then we need to make certain payments, and then those spare parts will be immediately deployed and then machines will be up and running. You know that wind turbine and solar, there are no complications. It's only certain spares which are the issues. So if -- there is 1 or 2 moving parts and couple of electrical components. That's all. So there is nothing specific other than all these things can be categorized as a financial difficulties, which has led to lower generation or machines not operating. Once you provide that capital, they are up and running. Of course, everything cannot happen overnight. That's why we are talking about that 15%, 16% will be in the next 1 or 1.5 month timeframe, more than 80% will be in 6 months and balance will be in 12 to 14 months. And whatever the EBITDA improvement we are talking about, 85% is primarily coming from generation, and so wind is already blowing. So you just make it running or sun is already shining. So you need to make all those interventions by providing the capital support.

Right. And how much capital support would you need to get this 200-odd megawatts up and running?

Close to INR 400 crore.

Over a period of time.

Of course, over a period of time like 12 months.

Okay. And second is, what kind of capabilities do you get with this acquisition? Do you get some O&M capabilities? Or would you still have to largely outsource it to the vendors?

So we are going to get a very good team, which has built these kind of projects because we are really building 2.5 gigawatt. So we know that this will be a very good addition to our portfolio because we want to grow our portfolio going forward. So that's part number one. The existing assets are being operated by third parties. Our philosophy so far for our construction is to do O&M ourself. However, there are various levers which we have identified. And as I said that there is a potential to reduce the O&M cost from INR 13 lakh per megawatt to INR 10 lakh per megawatt, which is a reduction of 25%. So that's what...

Can you talk, sir, about all these levers as well?

And over a period of time, we will be looking at various other synergies. That's why whatever we have talked about, we are talking about generation at P90. We are talking about O&M costs on a third-party outsourced basis. And there are further upside potential, which we will be doing in due course of time, which we will not like to talk at this point of time.

Understood. That's helpful. If you can also give some color on these O&M improvements. What are the key drivers there?

So we will achieve it because it's not important that what are the things which we do. I think we are very clear that we will achieve this 25% reduction. It's in our hands. What we can do, we have talked about that.

I mean, Puneet, you have to take comfort from the fact that you benchmark by any fuel type of operation, our O&M cost, whether it is the hydro business, whether it is the CFBC boiler based lignite generation business or whether it is a normal thermal business. You look at any of the O&M costs across the businesses, and we would invariably amongst the lowest in the O&M cost in the sector. So I think the point that Prashant is trying to say is this that the same efficiencies are going to be replicated across these bouquet of assets as well, yes.

Understood. So just two more from my side. If you can share, what is the underlying assumption of the EBITDA margin here for your INR 1,690 crores of normalized EBITDA and the PLFs for solar and wind?

You need to look at either PLF or the margins because these are irrelevant numbers. The only important number is that what is my generation at what probability factor because PLF is depending upon the various other things. What is the machine side, what is the machine height, what are the -- what is the power curve. So those things are -- cannot be benchmarked. For the same machine at a particular location, you need to see that what kind of a generation you are getting as per the design. So transition, what we have talked about is P90. Industry normally operates anything between [ P675 ] to P90. In terms of solar, industry is operating between P50 to P80 number. So we are talking both solar and wind is at P90 number. That's number one. And EBITDA margins are also irrelevant because here, we are not having any kind of a raw material. Only O&M is the one cost, which we have already talked about that we are talking about current O&M from INR 13 lakh to going to INR 10 lakh, and which is by -- we feel that there are other levers which we can further optimize it going forward.

[Operator Instructions] We have a next question from the line of Apoorva Bahadur from Investec.

Congratulations on a very good acquisition. So I wanted to understand if we are also getting any site in this transaction along with the existing installed assets with which we can utilize later?

Sorry, we -- I could not get your question. Can you repeat it, please?

Sir, I wanted to know if we are also getting any land sites or wind power generation sites along with the existing...

You mean the pipeline.

No, sir, not the pipeline. So what I'm talking about is -- so a lot of the older wind developers had actually taken the permissions and the required approvals and procured land in areas which had very high wind generation...

P There is none. There is none. But for your information, we are having already such kind of a site, which -- where we can build more than 10, 20 gigawatt of the capacity.

Okay. Okay. Fair enough, sir. Sir, secondly, if you can also throw some light on how much of these wind capacities especially are based on feed-in tariff? And how much of it bid based? And the average where it is possible.

[indiscernible]

Sorry, I didn't get you, sir.

We will have to check that and then give you the color in...

If I can do some approximation -- a quick approximation. Of the 1,331 megawatt of wind, approximately 1,100 megawatt should be -- which would be the legacy asset, which are on the feed-in basis. And about 250 megawatt is what's under the competitive bidding scenario. Is that what you were looking for?

Yes, sir, that's exactly what I was looking for.