JSW Energy Limited (533148) Earnings Call Transcript & Summary

Good evening. Thank you, everyone, for joining JSW Energy conference call regarding the acquisition of O2 Power. We have management of JSW Energy, Mr. Sharad Mahendra, Joint Managing Director and CEO; Mr. Pritesh Vinay, Director, Finance and CFO; and Mr. Bikash Chowdhury, Head, Investor Relations and Strategic Finance. We will have opening remarks from the management followed by Q&A. I now hand over the call to Mr. Sharad Mahendra. Thank you, and over to you, sir.

Thank you, Yashashvi. Good evening, everyone. And a very special thanks to all of you for joining this call on a very, very short notice. As it has been told today is a landmark milestone, which your company has achieved. That was the reason of this - such a short notice to have this call. I'm pleased to announce that JSW Neo Energy has signed a definitive agreement to acquire O2 Power Renewable Portfolio. O2 Power is a 4.7 gigawatt renewable platform jointly established in 2020 by EQT Infrastructure and Temasek. This is our largest acquisition since its inception and marks a significant milestone in our journey towards driving sustainable future. This acquisition will be immensely value accretive to our shareholders and is a testament to our commitment to prudent capital allocation. By integrating O2 Power's high-quality renewable energy assets into our portfolio, we are accelerating our growth, leading to a locked-in capacity of 25 gigawatts. Having said that, I would like to take this opportunity to welcome the experienced management team and employees of O2 Power to JSW Energy. O2 Power's track record of execution is truly commendable and we are excited to have O2 team as a part of JSW family. I'm sure that by combining our strengths, we will continue to deliver exceptional value to our customers and make a positive impact to our stakeholders. To provide a brief overview of the assets, the platform has total locked-in capacity of 4.7 gigawatt. Of this, 2.3 gigawatts expected to be operational by June 2025. Additionally, it has 1.5 gigawatt of under-construction capacity, which has secured power purchase agreement of 974 megawatts of pipeline projects with letter of awards. The portfolio spans across various modes of generation, including 1,731 megawatt wind, 475-megawatt -- solar of 1,731 megawatts and wind of 475 megawatts and complex solutions, such as hybrid, of 1,580 megawatts. Round the clock and firm dispatchable renewable energy at 910 megawatts. It is spread across 7 resource rich states with JSW already present in 5 of these states. Regarding off-takers, the portfolio is predominantly tied up with high-quality off-takers with 87% of the capacity secured by utility scale off-takers like SECI, SJVN and NTPC. The remaining 13% of the portfolio amounting to 596 megawatts is tied up with high credit rated commercial and industrial customers. Our rationale for acquisition is that it accelerates our growth, increasing our locked in capacity by 23% to a total of 25 gigawatt. We are also welcoming an onboarding and experienced management team of 370 employees from O2 Power who have a proven execution record and have been instrumental in O2 growth journey. Connectivity and land acquisition, as we all know, are significant challenges today in renewable energy project execution. However, O2 Power has secured an additional 1,708 megawatts of connectivity beyond 4.7 gigawatt locked-in capacity, which can be leveraged for our future projects. Regarding land, 40% of the land required for under construction and pipeline projects has already been acquired with very clear visibility for the entire portfolio. Acquiring these resources are part of deal price and enables us to increase acquired platform capacity to 4.7 gigawatt by June '27. JSW Energy has hands-on experience in undertaking self-O&M practices at all our locations. Given our location overlap with the assets being acquired, we can leverage that to bring O&M cost synergies leading to better economics. We also intend to integrate O2's portfolio with our existing state of our integrated digital command center. I want to express my confidence that together, we will fully harness the potential of these renewable assets. This will not only enhance our generation capabilities, but also create new jobs and stimulate economic growth in the communities where these projects are located. As we have been saying regularly, we, at JSW Energy, look at cash returns before committing capital. With a blended tariff of INR 3.37 per kilowatt hour, strong credit and lower receivable days, acquisition of O2 Power is highly return accretive asset for our portfolio. We expect steady-state EBITDA of approximately INR 1,500 crores on 2.3 gigawatts of portfolio, which will be operational by June '25 and on a fully completed basis of 4.7 gigawatt capacity, the steady-state EBITDA of INR 3,750 crores. The transaction values O2 Power at an enterprise value of INR 12,468 crores after adjusting for net working capital. On a fully built -- build-out basis for the entire 4.7 gigawatts, the EV/EBITDA multiple will be in the range of 6.8x to 7.1x. Thank you very much, and maybe we'll request for questions if anyone has any. Thank you very much.

[Operator Instructions] We have a first question from the line of Sumit Kishore from Axis Capital.

Good evening, my compliments on the O2 Power acquisition. I have a couple of questions. The first one is what is the operational capacity as on date. And in the enterprise value mentioned, what is it that you have considered as the gross block for 2.3 gigawatt operational capacity? And what part is in CWIP adjusted for net working capital?

Sumit, I'm Pritesh here. Sumit, the operational capacity as we are speaking is over 1,200 megawatt, which by June '25, will go to 2.3, which means another 1,100 megawatt approximately will get completed by June '25. Gross block and CWIP numbers, we will not be able to share at this stage because that -- it will be more appropriate to share those numbers at the time of the closing and the consummation of the transaction with a carved-out balance sheet at that point of time, yes.

What is a rough timeline for the COD of the 2.4 gigawatt under construction of pipeline capacity?

By -- we expect that to be done by June 2027.

June 2027?

Yes.

Second question is, could you speak about the net debt to EBITDA or net debt to equity on a pro forma basis post the O2 acquisition? And what is the -- could you repeat your ceiling levels for these metrics and room to accommodate growth using internal accruals. So just one additional point to this question is, of the 24,708 megawatt total locked-in capacity, would you need any fundraise to carry out this plan?

So again, many of the balance sheet metrics, we will be able to share at the time of the closing, but the way to look at it is that given that these are new assets, right? The remaining plant life for the operational assets is 23 years. And bulk of the assets are actually yet to be completed, right? So you can very well use the standard thumb rules of initial, 3:1, 75-25 or 80-20 debt equity funding depending on the kind of DSCRs that these individual projects can support with very strong counterparty credit risk and interest costs and you'll be able to come to a ballpark leverage profile, which should be standard for any greenfield capacity of a similar type. That's point number one. Point number two is this, as far as the ability to fund and all that is concerned, yes, we are very, very comfortable. I think that you just don't get into the largest acquisition since your inception without thinking of these optionalities. Suffice to say that currently, there is actually additional headroom to load incremental debt to all the target SPVs itself, given that the underlying cash flows are stronger and bulk of the capacity build-out is still to be done. However, in all these questions, it is always sensible to come back to the guardrails in terms of protecting the credit ratings on a consolidated basis. And hence, we believe that the guardrails that have been set from a rating agency's point of view will be adhered to and ballpark the guidance of about 4.5x to 5x net debt to EBITDA, that should be largely on a steady state normalized basis. On the third part of your question, which is linked to any potential fund raise, that at the right time, if there's a need, we will surely consider, yes.

Sure. Just one clarification, the 4.5x net debt to EBITDA is after excluding debt for under construction projects.

So I'm talking on a consolidated basis, Sumit, for the overall portfolio, right? And typically, if you start any new renewable project and go with 3:1 debt equity and you try and fit, say, 1.25 average debt service coverage ratio, you invariably will land to something in the range of 5x to 5.5x debt to EBITDA, right? So that is cushion from a rating agency point of view because you have a long tenor offtake agreement with strong counterparties, right?

[Operator Instructions] Next question is from the line of Abhishek Nigam from Motilal Oswal.

So just 2 questions. So one, anything that you can disclose about the C&I offtakers, that will be useful?

So there is roughly 600 megawatts -- approximately 600 megawatts, the details are there in the presentation that has been uploaded with C&I. And on C&I, I can just give you a sense that about more than half, about 55% to 60% of the C&I portfolio is with AA-rated credit offtakers.

That's useful. And any further improvement that you see in the credit rating because now this is part of JSW Energy, although I understand the credit rating might be on the -- at the SPV level. So any benefit that you see over there?

You mean the credit -- the current credit rating of the O2 SPVs, project SPVs?

Of these SPVs. Yes, yes.

So again, it will be a bit premature. We've just signed an SPA. We need to go through the CPs and get the requisite approvals before we can consummate the transaction and the deal actually gets transacted. I think it will be more appropriate for us to comment on that once we are in the driving seat, yes?

And just last question. I mean, should we expect deal completion in, say, about 3 to 6 months? Or how does it...

The deal is for 5 months. If you look at the stock exchange disclosure, which has gone out, it is mentioned there. So the longstop date for consuming is about 5 months from the date of SPA signing, but of course, both parties would be interested to consume it at the earliest. So let's see. We'll keep you updated on how that is progressing.

We have a next question from the line of Murtuza Arsiwalla from Kotak Securities.

Congratulations on a good acquisition. Would it be possible to share the details, the 4.7, I would assume, is AC capacity. Would you be able to share what the underlying sort of DC solar capacity and the wind and battery storage that will be supporting the hybrid and FDRE assets as well?

So, Murtuza, Slide number 6 of the presentation gives a pie chart of the breakup of wind, solar, FDRE and hybrid, but I don't think it will be possible to get project by project DC overloading on the solar power and the breakup of the FDRE, so hybrid project because the sizing will also depend on the 2 factors, which is the location where it is coming and the technology of the equipment that has been used, right ? So in that way it would be premature at this stage, yes.

Okay. If I could put an alternate question. You're looking at an overall acquisition where you're putting this 4.7 gigawatts at about INR 25,000 crores of enterprise value taking into consideration the incremental CapEx. Any ballpark estimate if you had to put all of this capacity from scratch together, what would be sort of the cost it would have taken? So definitely put how much of a discount or premium?

Yes. Murtuza, I will definitely say this is a very, very valid question because whenever we are evaluating any asset, we also -- the basic comparison is build or buy. We all know that today, if any greenfield project if we benchmark with maybe on a fully built portfolio, if we talk, you can say that if solar, a reasonable assumption of taking INR 4.2 crores, INR 4.25 crores per megawatt on an AC basis is normally the project cost, which has been prevailing. And wind, as we all know, that is in the range of INR 8.5 crores per megawatt. Even if I take JSW as we are known for our own efficiencies, then also maybe with this kind of portfolio of 4.7 gigawatts, we benchmark this with these numbers, which I just shared, then we can -- easily you can arrive at that what will be the build value and at what we are buying. So it's definitely, and as we all know, on a fully completed basis, if you see the EV/EBITDA between 6.8x to 7.1x, the way [indiscernible].

[Operator Instructions] We'll take our next question from the line of Mahesh Patil from ICICI Securities.

Congratulations on the acquisition. So my first question is on the comment that you made on the 1,708 megawatt of connectivity that is present outside this 4.7 gigawatt? is that right?

Yes, yes. That's correct.

Okay. And 40% land acquisition, you have mentioned, this is for under construction plus under planning projects, right?

Yes. Exactly, yes.

Okay, okay. And sir, the question is on the -- so around -- out of this 2.25 gigawatt that is expected to be operational by June '25, can you just give us a rough breakup of the solar and wind mix in this?

See, the total capacity, when we talk of 4.7 gigawatts. Out of this, close to about -- you can say, ballpark number about 3 gigawatts is solar and rest is wind. Of course, a part of the solar in the presentation, when you see in our slide, it is -- pure solar is 1,731, and then balance of the solar is part of FDRE and the hybrid also. So if you have to divide purely the total portfolio of 4.7 into wind and solar, so that will come to close to about 2.9 to 3 gigawatt solar and the rest is the wind capacity, which is there.

Okay, sir. And by June '25, we are expecting around 2.25 capacity and any estimate for the March '26 figure? Do you have any capacity in mind in terms of operations?

Not at this stage because this will be all when we will be going into the details, we will do that.

We have our next question from the line of Vishal Periwal from Antique Stockbroking.

Yes, congratulations on the deal. A couple of questions. One, I mean, again, if one look at net working capital of roughly INR 2,700-odd crores, which is in the PPT, so does this also include advances or anything because our revenue is hardly anything on operational asset as of now?

No. Bulk of that, Vishal, is actually cash.

Okay. Okay. Got it. And second, is it possible to give a breakup of operational capacity, that 1.2 gigawatts, which you mentioned, a ballpark number?

1.2 gigawatt, which is operational about maybe the ballpark number of around 400-odd is...

No, no. About -- yes, about -- close to 970 megawatts is solar, and 275 is wind.

That's correct. Yes.

Okay. Got it. And then just the last part of the acquisition amount that we have paid, the EV of INR 12,500-odd crores, so that is fair to say it's largely for the 2.3 gigawatt of capacity in terms of the actual money, which has gone out. I know we have PPA, land and other things also, but probably from CWIP point of view, large part is for 2.3 gigawatt?

Yes. So it's -- so we are looking at it as a platform, right? We leave it to you to break it under which side you want to park what much amount because one is looking at -- you're getting an operational capacity and an bolt-on ability with incremental both operational capacity accretion as well as EBITDA and cash flows coming in. You're getting an optionality to accelerate growth with a high-quality portfolio of assets, where a significant amount of imponderables like land connectivity, PPA, et cetera, are already in place. You're getting access to a very high-quality skilled and talented management team and workforce, which has that execution capability. And you are looking at the optionality of future growth because of additional connectivity that is available. So there are multiple moving parts. I think it will not be fair to isolate that, this is what we are paying only for this because you're also assuming debt, which is there at the target SPVs at this point of time. There will be adjustments related to net working capital and if there's an additional equity that is going in to ensure that the projects get completed on time and some closing adjustments, which are customary for deals of this kind. So I hope I am able to give you a picture of why it is difficult to pinpoint under which exact head, how much of value is housed.

Okay. That's fair enough. I mean, what I was trying to say is like, incremental capital expenditure, which is required. It's almost like INR 5.5 crores is for the balance capacity. But anyways, I mean, your point is well-taken, sir. Maybe one last thing, yes. So in terms of our EBITDA per gigawatt number, if one look at it like INR 1,500 crores EBITDA for the first the 2.3 gigawatts, which is almost like INR 650 crores per gigawatt. And incrementally this is moving towards if we combine everything together, 4.7, it moves to almost like 750 or maybe plus that. So I mean, is it like the initial capacity has -- I mean, like the tariffs are a little lower vis-a-vis the other part or maybe like other part has FDRE that's why it is moving higher?

No, we have to see that maybe on 2.3 when we start talking of this EBITDA, on an annualized basis, if you see, this part capacity, which is coming normalized INR 1,500 crores and then the mix changes. If you see today solar and wind ratio, overall portfolio on a fully built basis, you see the wind portfolio is going to be increasing in the overall as compared to what it is in 2.3, and where the tariffs are higher. But normally, we all know that wind tariffs are higher as compared to solar and the complex solutions of FDRE and round-the-clock power and the hybrids are a significant part in the capacities beyond 2.3 gigawatt. So tariffs are higher in the capacities to be built. That is the reason resulting in per gigawatt of EBITDA per megawatt, what you are saying, increasing on a fully-built basis.

And if I may add to that, look, ultimately, whichever way use slice and dice, the way we look at it as allocators of capital is that eventually from an equity IRR point of view, are my hurdle rates going to be met or not regardless of the fuel type, right? So on these valuations, our mid-teen equity IRR is very comfortably being met. And hence, we are excited about this opportunity.

Can we take the last one question, please.

We'll take our last question from the line of Vishal Biraia from Bandhan AMC.

Of the receivables that are there, are there any that are delayed by more than 6 months or any that are struck?

No, no. No, in fact, these are -- the receivables here in this platform are very healthy 43 days on our total receivables with nothing with 6 months or anything, which are a concern. Everything are all regular receivables with 43 days receivable age, which is very, very good as compared to what is prevailing on an overall basis in the industry.

Okay. And what portion of 1.2 gigawatt that is operational is tied up with the states?

Tied up with the states will be a smaller portion.

Okay. What portion would be that? What quantum?

It will not be more than 20% -- 15% to 20% at max, yes.

Sir, that was the last question. Any closing comments?

Yes. Thank you very much. Once again, thanks for being with us at such a short notice, especially on a weekend and the time of -- festive time. And it is really good interacting with you all. And any other queries, which come up, our Investor Relations team will be available to answer any queries which can come later, you can -- they can be approached. And we're wishing you all and everyone in your family, and near and dear ones a very, very happy and prosperous 2025 and look forward meeting you, interacting with you again in the new year. Thank you very much.

Thank you, members of the management team. On behalf of JSW Energy, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.