The Centre targets 500 GW of installed capacity from non-fossil fuel sources by 2030 alongside additional thermal capacity of 93 GW by 2032, to ensure energy security. SJVN Ltd, a constituent of BSE Utilities Index, appears strategically positioned to capitalise on both fronts. The company is diversifying its energy portfolio beyond hydropower and renewables, enhancing its future growth prospects.

SJVN’s stock has surged by 41 per cent on a year-to-date basis, currently trading at a forward price-to-earnings ratio of around 28.7 times, representing a premium of more than 100 per cent compared to its two-year average P/E of 13.5 times, indicating a steep valuation. However, the forthcoming thermal plant is poised to substantially increase the company’s capacity by over half of its current installed capacity, potentially translating into higher revenue streams.

According to Bloomberg consensus estimates, SJVN is projected to experience revenue and PAT CAGR growth of 44 per cent and 36 per cent, respectively, from FY23 to FY26. The company’s hydro and upcoming thermal project benefit from regulatory-based earnings, offering revenue visibility over the long term. Furthermore, while solar and wind energy sources may pose intermittency challenges, hydropower’s flexibility can mitigate these issues, facilitating a smoother transition to clean energy.

Considering the balanced risk-reward scenario, existing investors may hold on to their investments in SJVN. However, initiating fresh positions may not be advisable at this juncture.

Business

Established in 1988 through a joint venture between the Government of India and the Government of Himachal Pradesh, Satluj Jal Vidyut Nigam Ltd (or commonly known as SJVN) operates India’s largest single installed hydro power plant capacity of 1,500 MW in Himachal Pradesh. The company’s energy portfolio comprises hydro (83 per cent), solar (13 per cent), and wind (4 per cent) sources, with an overall installed capacity of around 2,377 MW. Revenue generation primarily stems from long-term power purchase agreements (PPAs) with State distribution utilities, supplemented by power trading, transmission, and consultancy segments.

The tariff structure for SJVN’s PPAs follows a cost-plus model regulated by the Central Electricity Regulatory Commission (CERC), ensuring a fixed return on equity (ROE) above operational expenses and interest on loans. Incentives are awarded for surpassing normative plant availability factors and contributing to grid stability. Additionally, SJVN extends its operations through wholly owned subsidiaries and joint ventures, including SJVN Thermal Private Ltd, SJVN Arun-3 Power Development Company Private, SJVN Green Energy Ltd (SGEL), and Cross Border Power Transmission Company Ltd (a JV with 26 per cent stake), focusing on thermal, hydroelectric, renewable and power transmission projects in India and Nepal.

Additionally, SJVN has been appointed as a Renewable Energy Implementing Agency (REIA), the other three entities being SECI, NTPC, and NHPC. With this, it will be tasked to assess renewable energy demand from state discoms and solicit bids from developers, thereby earning a trading margin of ₹0.07/KWH.

Performance

In the first nine months of FY24, SJVN witnessed a decline in power generation to 7,606.3 MUs, marking a 10 per cent decrease compared to the previous year. This reduction can be primarily attributed to a 12 per cent drop in hydro generation, due to adverse weather conditions, including flooding in Himachal Pradesh during Q2FY24 and low water discharge in the river Sutlej during Q1 and Q3.

Despite near-term challenges in hydro generation, SJVN maintained a plant availability factor (PAF) exceeding 100 per cent for its main plants, Nathpa Jhakri HEP (NJHPS, 1,500 MW) and Rampur HEP (412 MW), since FY20, surpassing the Normative PAF (NAPAF) of 90 per cent and 85 per cent, respectively. This ensured full recovery of annual fixed charges and entitled the company to incentive income, totalling ₹210.3 crore in FY23 compared to ₹192.8 crore in FY20.

Revenue from operations decreased by 14 per cent to ₹2,096.46 crore in 9MFY24 compared to the same period last year, primarily due to reduced hydro generation, with a sales drop of over 17 per cent in hydro power while the sales of renewable power (including solar and wind) increased by more than 50 per cent. The company reported a 36.6 per cent YoY drop in net profit to ₹850 crore for 9MFY24, leading to a margin contraction from 55.1 per cent to 40.6 per cent. However, the Bloomberg consensus estimates expect the full year revenue and profit in FY24 to grow by around 10 per cent and 6 per cent YoY, respectively.  Falling short of the estimates may elicit a negative market response.

On a positive note, in March, the Himachal Pradesh (HP) High Court declared the State government’s imposition of water cess on hydropower generation as unconstitutional. This ruling is expected to yield considerable tax savings for SJVN, as 80 per cent of its installed (1,912MW) and upcoming capacity (658 MW) is based out of HP. The company’s D/E increased to 1.22 as of Q3FY24 from 0.77 in the corresponding period last year, while the interest coverage ratio fell to 4.5 times compared to 14 times.

This rise in leverage can be attributed to increased long-term and short-term borrowings for the projects under construction and fluctuations in exchange rates on foreign currency loans. Nevertheless, the company’s management has planned to raise funding by monetisation of partial earnings of the NJHPS through Securitisation of its Future RoE.

Outlook and risk

SJVN has invested ₹3,800 crore out of ₹10,000 so far in the first half of FY24. Looking ahead, management aims for a capex of ₹12,000 crore in FY25. The company presently has an under-construction capacity of about 4,778 MW, distributed across four hydro projects, one thermal project, and nine renewable projects, with capacities of 1,558 MW, 1,320 MW, and 1,900 MW, respectively. Additionally, SJVN is conducting feasibility studies for pumped hydro storage projects with a potential capacity of about 5,000 MW. Management has set ambitious targets, aiming for a capacity addition of 12 GW by FY26 and 25 GW by FY30.

Despite promising growth prospects, investors should exercise caution regarding the inherent risks associated with hydro-electric projects, such as geological uncertainties, potential time and cost overruns, legal complexities, and opposition from stakeholders. Further, as per CARE Edge Rating agency, the acquisition of favourable PPAs remains a crucial challenge in this sector.

However, it’s noteworthy that SGEL has successfully secured tie-ups for the entire 1,000-MW solar power capacity from the Bikaner Solar Power Project. Additionally, the upcoming Buxar thermal power plant, with a capacity of 1,320 MW and expected to commence operations by September 2024, has already secured a PPA for 85 per cent of its output with the Bihar State Power Holding Company Limited. Alongside, SJVN has demonstrated assertiveness in the renewable energy sector, evident from its procurement of multiple orders.

However, these positive developments are juxtaposed against concerns regarding premium valuation. Nonetheless, considering the balanced risk-reward scenario, investors may find it prudent to maintain their holdings in SJVN’s stock.

Related Topics
comment COMMENT NOW