The Hindu Business Line : Jaiprakash Hydro-Power: Invest at Rs 32

INVESTORS can consider subscribing to this initial public offer of shares by Jaiprakash Hydro-Power at Rs 32 per share (PEM of 12) with a medium/long-term perspective. The project is already operational and there is good revenue and cash-flow visibility in its business model over the medium-term. Payment security for power supplied to the State electricity board has been adequately addressed through the power purchase agreement.

However, there are two risks to the investment. First, the state electricity regulator has yet to approve the tariff pending the clearance by the Central Electricity Authority (CEA) of the project's financial plan. In the interim, the company is receiving payment at a rate lower than the determined tariff.

Second is the strategy of the Jaiprakash group to have a presence in hydro-power through different companies. How the activities of these group companies will be harmonised in the near future is still uncertain.

Jaiprakash Associates is making an offer for sale of a part of its holding in its 100 per cent subsidiary, Jaiprakash Hydro, at a price between Rs 27 and Rs 32 through the book-building route. The parent company will hold a 63.34 per cent stake after this offer.

JHPL operates the 300 MW Baspa II hydroelectric project in Himachal Pradesh. The project, originally conceived more than a decade ago, was commissioned in June 2003 at Rs 1,667 crore, financed with a debt:equity ratio of 70:30, in line with the Central Electricity Regulatory Commission norms. The funding included Rs 491 crore of equity financed by the parent company.

Jaiprakash Hydro supplies the power generated from the project to the Himachal Pradesh State Electricity Board with which it has signed a 40-year PPA; the agreement provides for purchase of 88 per cent of the power generated by the project with the balance 12 per cent to be supplied free of cost.

There are adequate safeguards to protect the company's interests. Payment security has been taken care of by means of an escrow account to be opened by HPSEB into which will go revenues from sale of power in designated areas. Monthly payments will be by means of an irrevocable letter of credit. In addition, the State government has also guaranteed the payment obligations of the electricity board.

The power plant depends on perennial availability of water in the snow-fed Baspa river, which means that water flow would vary depending on the time of the year. This risk has been addressed in the agreement, which says that if power generation falls due to non-availability of adequate water, the company will be paid the energy charges for generating up to the design energy (minimum possible generation) during the first seven years of the project.

Jaiprakash Hydro will be eligible for a 16 per cent return on equity plus incentives for making the plant available for generation beyond a stipulated level. The tariff, which was Rs 2.95 per unit in the first year, will progressively decrease as the fixed component such as interest costs decline when loans are repaid.

Investment risks

The Himachal Pradesh Electricity Regulatory Commission has not yet approved the tariff of the project. The project cost and funding pattern is pending the mandatory approval of the CEA and the tariff cannot be cleared unless this approval is secured.

Against the total amount of Rs 1,667 crore spent by Jaiprakash Hydro, the State government and the electricity board have approved Rs 1,550 crore only, which has been sent to the CEA for approval. If the CEA approves this or an even lower sum, the company will have to write off the difference against its profits in the year in which the tariff is determined.

Given that this will be with retrospective effect, the impact may be material on the concerned year's profits. The tariff could also be lower based on the cost finally approved. Pending the approvals, the company received Rs 2.09 per unit for its supplies in 2003-04 and Rs 2.25 per unit in the first six months of this fiscal. However, even at the lower tariff, the cash generation and the company's earnings appear healthy. The write-off is a one-time occurrence and will not have an impact on the long-term performance of the company.

Jaiprakash Hydro has also renegotiated its terms loans at lower rates of interest. This will benefit the company indirectly as its tariff will decline making its power more attractive to the electricity board.

The Jaiprakash Group is also implementing two other hydroelectric projects — the 400 MW Vishnuprayag project in Uttaranchal and 1000 MW Karcham Wangtoo project in Himachal Pradesh — through two other group companies. These two companies — Jaiprakash Power Ventures Ltd and Jaypee Karcham Hydro Corporation Ltd — are wholly-owned subsidiaries of Jaiprakash Associates.

The strategy for having such multiple group companies in the same industry is unclear and there is certainly some uncertainty on how the activities of the three companies will be harmonised in the long-term.

Investors need to note another point. Jaiprakash Hydro is a single-project company and revenue and earnings buoyancy will, therefore, be limited. With earnings pegged to return on equity (capped at a maximum of 20-22 per cent, including incentives), the company needs to soon look at newer projects to inject buoyancy in the revenues, earnings and cash flows. This factor may have a bearing on the stock valuation. The offer opens on March 22 and closes on 29.

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