<p><em>Diluting equity to finance power unit buys in a depressed power market may be a risky strategy, says <strong>Neeraj Thakur </strong></em><br> </p><div>JSW Energy has shown a tremendous risk appetite for buying distressed power assets in the market. With the announcement of an MoU to buy Jaiprakash Power’s (JP) Bina (500 MW) power plant, the group is now in official talks to buy three of JP’s assets with a total generation capacity of 1891 MW. Not just this, JSW Energy is also eyeing an under construction 1050 MW power asset of Monnet Ispat.</div><div> </div><div>Through the acquisition of these assets, JSW Energy wants to double its power portfolio to 6,081 MW from the current level of 3140 MW.</div><div> </div><div>If we leave Adani Power that managed to buy one power asset for Rs 6,300 crore from Lanco, other groups like Reliance Power and Tata Power have not shown the heart to take the risk in this market where infrastructure companies are ready to sell their power plants to pay off their debt. While JSW Energy has one of the best debt-to-equity ratio in the sector, its strategy to grow inorganically can make the balance sheet of the company similar to the players who want to sell their power plants in the market.</div><div> </div><div>With its debt of Rs 8,210 crore in March 2015, the purchase bill of the new assets - if all deals go through- would be around Rs 20,000 crore.</div><div> </div><div>JSW energy’s debt-to-equity ratio in March 2015 was just 0.47, a sign of a healthy company.</div><div> </div><div>The management of JSW Energy has said that it was ready to infuse equity into the company to fund acquisitions. However, to fund its acquisition spree, the promoters will have to dilute a significant amount of equity in the company. A brokerage analyst requesting anonymity said “no promoter wants to put in equity above 5,000 crore so easily.</div><div> </div><div>If Jindals do that, it would be a bold step to grow through brownfield projects in a depressed power market.</div><div> </div><div>Thermal power plants across the country are struggling with low plant load factor. NTPC reported a decline in its PLF at 77.6 per cent from 84.3 per cent in the first quarter of FY16.</div><div> </div><div>JSW energy’s own Ratnagiri power plant with a generation capacity of 1080 MW has reported decline in unit sales due to lack of demand from state discoms in the past. The company's plant load factor, a measure of the utilisation of a power plant, declined 75 per cent in the June quarter of FY16 as against 84 per cent a year ago.</div><div> </div><div>In such a scenario, even if the company is occupying operational assets, chances are that the company would not be able to realise margins required to retire the newly acquired debt on the company’s balance sheet.</div><div> </div><div>While the company management in its press conferences has said that it is looking at long term gains from these acquisitions, it would be important to note that in the long term, thermal power market will face pressure on margins from renewable energy players who are beginning to quote prices at Rs 5 per unit. Analysts expect the per unit realisation for JSW Energy power plants at Rs 4 per unit in FY16 and FY17, this guidance itself put a question mark over the valuation of the assets that the company is eyeing.</div>
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