march 23, 2010 jaiprakash power ventures ltd...

March 23, 2010

ICICIdirect.com | Equity Research

Initiating Coverage

On a firm footing… Jaiprakash Power Ventures Ltd (JPVL), a part of the $7 billion Jaypee group, is the result of amalgamation between the erstwhile Jaiprakash Hydro Power (JHPL) and Jaiprakash Power Ventures (JPVL). The combined entity has a successful track record of operating 700 MW of hydro projects - Baspa-II (300 MW) commissioned in 2003 and Vishnu Prayag (400 MW) commissioned in 2006. In FY09, the erstwhile JHPL generated 1,291.9 million units (MU) while JPVL generated 2,033.3 MU vis-à-vis 1,280.8 MU and 1,871.0 MU in FY08, respectively. The conglomerate entity is aiming to achieve ~13,500 MW of installed capacity by FY19E with a diversified fuel mix. JPVL is expected to command an optimal 60:40 thermal-hydro mix. The upcoming hydro project at Karcham Wangtoo (1,000 MW) is well on track to achieve the commissioning six months ahead of schedule in May 2011. The parent company (JAL) has demonstrated significant execution strength clubbed with better operational performance at existing projects. Thus, we are initiating coverage on the stock with an ADD rating.

Total ~16 fold growth in installed capacity over the next six years JPVL has an installed capacity of 700 MW as at the end of December 2009. The company has an ambitious growth plan and is targeting ~11,050 MW by the end of FY16E. Total ~1,500 MW is expected by FY12E. JPVL is diversifying into other fuel mix with the first thermal plant Bina – I expected in the second half of FY12.

Superior asset quality getting reflected in operational numbers JPVL is generating at an implied plant load factor (PLF) of ~100% in the peak flow season. This is far in excess of the overall PLF generated by hydro-based capacities in India. For FY09, the overall Indian hydro generation is operating at an implied PLF of ~34.1% and JPVL is commanding a much superior implied PLF of ~54.6%.

Valuations

At the CMP of Rs 67, the stock offers ~6.2% upside potential. JPVL has 700 MW of plants operational, which comprises Rs 17 per share and ~24% in overall value. Expansion plans form the remaining portion of overall value. The demonstrated capability of parent company (JAL) renders significant comfort to upcoming expansion plans. Thus, we initiate coverage on the stock with ADD rating and target price of Rs 71.

Exhibit 1: Key Financials (Rs Crore) FY08 FY09 FY10E FY11E FY12E

Net Sales 307.6 288.9 704.8 688.0 2181.7

EBITDA 275.7 273.3 647.9 664.9 2098.2

Net Profit 214.9 142.9 221.3 270.9 644.0

PE (x) 66.3 99.8 64.4 52.6 16.5

Target PE (x) 69.7 104.8 67.6 55.3 17.3

EV/EBITDA (x) 65.5 66.1 27.9 27.2 8.6

P/BV (x) 3.2 3.1 4.3 3.9 3.3

RoNW (%) 20.9 13.3 6.6 7.5 15.1

RoCE (%) 12.2 11.8 10.7 5.5 12.0 Source: Company, ICICIdirect.com Research

Jaiprakash Power Ventures Ltd (JAIHYD) Rs 67

Rating Matrix Rating : Add

Target : Rs 71

Target Period : 12-15 months

Potential Upside : 6%

YoY Growth (%) FY09 FY10E FY11E FY12E

Total Revenue -1.4 137.6 2.7 236.3

EBITDA -0.9 137.1 2.6 220.1

Net Profit -33.0 56.1 22.4 145.5

Stock Data Market Capitalisation Rs 14251 CroreDebt (FY10E) Rs 5087 CroreCash (FY10E) Rs 1280 CroreEV Rs 18058 Crore52 week H/L 105/24Equity capital Rs 210 CroreFace value Rs 10MF Holding (%) 3.3FII Holding (%) 3.3

Comparative return matrix (%) Stock return (%) 1M 3M 6M 12MJPVL 1.0 -7.0 -18.9 146.1NHPC -2.2 -1.6 -11.9 NATata Power 8.4 1.9 2.1 104.2NTPC 0.0 -2.8 -3.0 15.0

Price movement (Stock vs. Nifty)

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Mar-10 Jan-10 Nov-09 Sep-09 Aug-09

(In R

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1500

2500

3500

4500

5500

(In U

nits

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JPVL (L.H.S) Nifty (R.H.S)

Analyst’s name

Jitesh Bhanot [email protected]


Company Background

Jaiprakash Power Ventures Ltd (JPVL), part of the $7-billion Jaypee Group, was formed as a result of amalgamation between the erstwhile Jaiprakash Hydro Power (JHPL) and another group company Jaiprakash Power Ventures (JPVL). For pre and post merger amalgamation scheme refer to annexure. JPVL is the largest private sector hydropower producer with over 700 MW of operational capacity. The erstwhile JHPL was incorporated in 1994 and the company was operating the 300 MW Baspa-II hydroelectric project in Kinnaur district of Himachal Pradesh since 2003. JHPL has acquired another JPVL, another group company, which had 400 MW of operational capacity at the Vishnu Prayag facility in Uttarakhand. Subsequently, the conglomerate entity was renamed as JPVL. Both operational plants have sold their power under the long-term offtake arrangements to the respective state government distribution utilities. Both power purchase agreements (PPA) are governed by the tariff policy of the respective state regulatory commission. Jaypee Associate, the parent company has demonstrated leadership in the construction of hydropower projects over 2002-2009 with an execution track record of over ~8,800 MW.

Exhibit 2: Jaiprakash Associates group structure (post amalgamation)

Hydro Power Projects Transmission Project Thermal projects

Projects under implementation

Jaiprakash Associates(JAL)

Jaiprakash Power Ventures Ltd. (JPVL)

76.3 %

Aruachal Project(3,200MW)

89.0 %

56.87 %76.0 %

Jaypee Powergrid LtdTransmission project

(230 km)

74.0 %

Karcham WangtooJKHCL (1,000MW)

Vishnuprayag HEP

(400MW)

100.0%

Baspa - II HEP

(300MW)

100.0%

Bina Project(1,250MW)

100.0 %

Bara Project (3,300MW)

100.0 %

Karchana Project (1,980MW)

100.0 %

Meghalaya Projects(720MW)

Nigrie Project (1,320MW)

100.0 %

Source: Company, ICICIdirect.com Research

Share holding pattern (Q3FY10)

Shareholder (%) holdingPromoters 63.3Institutional investors 6.7General public 30.0

Promoter & Institutional holding trend (%)

63.3

%

63.3

%

63.3

%

63.3

%

6.7%

5.0%

3.7%

2.6%

0%

20%

40%

60%

80%

100%

Q3FY10 Q2FY10 Q1FY10 Q4FY09Promoter Holding Institutional Holding

Projects under implementation


Investment Rationale

Jaiprakash Power Venture is a rapidly growing organisation with a spate of capacity additions of ~1,500 MW lined up over the next two years. JP Power Venture is diversifying its fuel mix and is targeting an optimal thermal: hydro mix of 60:40 by 2019. JPVL is likely to route ~38% of the overall ~13,470 MW under the merchant route. The remaining power will be routed under the long-term PPA route. The strong pipeline of projects under consideration coupled with the demonstrated capability of the Jaypee group puts JP Power Ventures in a sweet spot to exploit the opportunities available in the power sector.

Total ~16 fold growth in installed capacity over the next six years JPVL has an installed capacity of 700 MW as at the end of December 2009. The company has an ambitious growth plan and is targeting ~11,050 MW by the end of FY16E. Total ~1,500 MW is expected by FY12E. JPVL is diversifying into other fuel mix with the first thermal plant Bina – I expected in the second half of FY12.

Exhibit 3: Break-up of project wise capacity addition over the next six years

700

700

700 22

00

2200 35

20

7570

1105

00

2,000

4,000

6,000

8,000

10,000

12,000

Q1 Q2 Q3 Q4

FY10

E Q1 Q2 Q3 Q4

FY11

E Q1 Q2 Q3 Q4

FY12

E Q1 Q2 Q3 Q4

FY13

E Q1 Q2 Q3 Q4

FY14

E Q1 Q2 Q3 Q4

FY15

E Q1 Q2 Q3 Q4

FY16

E

Capa

city

(MW

)

700 E

E - Existing KW - Karcham Wangtoo B - Bina N - Nigrie BA - Bara K - Karchana LS - Lower Siang

1320 K - I

500 B - I1000 KW

660 N - I

660 K - II1500 LS - I

1320 BA - II

1980 BA - I750 B - II

660 N - II


JPVL will derive substantial synergies from the parent company (JAL). JAL is an integrated solutions provider for hydropower project and is expected to provide EPC services for hydro projects and civil services to the thermal projects undertaken by JPVL.

Sweet spot for Jaiprakash Power Ventures to exploitthe overall opportunities in the power sector

Total ~16 fold growth in the installed capacity isexpected over the next six years. JPVL will continueto be among the largest private sector hydropowercompanies over the next decade


Excellent track record of JAL as hydro-electric power (HEP) contractor Jaiprakash Associate (JAL) is the leader in the construction of multi purpose river valley hydro power projects and has over 40 years of engineering and construction expertise. JAL has completed ~ 8,840 MW of HEPs over the period from 2002-09. As a contractor, JAL has executed the largest concrete dam in India – Sardar Sarovar (1,450 MW), largest underground power house in India - Natpha-Jhakri (1,500 MW), largest rock fill dam - Tehri (1,000 MW) and second largest surface power house in India – Indira Sagar (1,000 MW).

Exhibit 4: Projects executed by JAL as contractor


JPVL gaining market share in overall hydro generation JPVL has been able to maintain the run rate for electricity generation at the operational plants even in lull years. Bad monsoons over the last few years have resulted in a drop in the overall hydro generation of India. Thus, JPVL has marginally improved its share of generation in the overall India hydro generation scenario.

Exhibit 5: Trend in monthly generation for operational plants

0

150

300

450

600

750

2007

.01.31

2007

.04.30

2007

.07.31

2007

.10.31

2008

.01.31

2008

.04.30

2008

.07.31

2008

.10.31

2009

.01.31

2009

.04.30

2009

.07.31

2009

.10.31

2010

.01.31

Mon

thly

gen

erat

ion

Milli

on u

nits

(MU)

0

1

2

3

4

5

6

(%)

Baspa - II (LHS) Vishnuprayag (LHS) JPVL as % of overall Hydro generation (RHS)

Source: CEA, ICICIdirect.com Research

JAL has executed over 8,800 MW of projects from2002-2009 with execution of the largest hydropowerprojects to its merit

JPVL has been able to maintain the overallgeneration run rate and has marginally improved theshare of generation in overall India hydel generation


Superior asset quality getting reflected in operational numbers JPVL is generating at an implied PLF of ~100% in the peak flow seasons. This is far in excess of the overall PLF generated by other hydro-based capacities. For FY09, the overall India hydro generation has been operating at an implied PLF of ~34.1% while JPVL has been operating at a much superior implied PLF of ~54.6%.

Exhibit 6: Monthly PLFs for JPVL and overall hydro capacity PLF

0

25

50

75

100

125

2007

.01.31

2007

.04.30

2007

.07.31

2007

.10.31

2008

.01.31

2008

.04.30

2008

.07.31

2008

.10.31

2009

.01.31

2009

.04.30

2009

.07.31

2009

.10.31

2010

.01.31

(%)

Monthly PLF derieved for JPVL Monthly PLF derieved for India hydel capacity

Source: CEA, ICICIdirect.com Research

Existing hydro projects immune from bad monsoons Existing hydro projects (700 MW) and the upcoming Karcham Wangtoo (1,000 MW) are located on rivers that are fed by melting of glaciers to a significant extent. These rivers are less dependent on seasonal monsoons for their water flow. Hence, the plants will enjoy higher generation even in a year when seasonal monsoons are not up to the mark. Exhibit 7: Humungous plans for Jaiprakash Power Ventures


JPVL is operating at much superior implied PLFlevels of 54.6% in FY09 compared to the overall Indiahydro PLF levels of 34.1%

The project portfolio is less dependent on seasonalmonsoons compared to other players. We believeJPVL will qualify for incentives at both operationalplants even after considering a bad monsoon in thepresent year


One of the most active participants in carbon credits market JPVL is expected to have three hydropower projects (1,700 MW) operational by FY16E and four thermal power (7,850 MW) projects. Six out of the seven plants will be eligible for receiving benefit under the carbon mechanism. The company is an active participant in the carbon market. JPVL has been realising income from trade of certificates called verified emission reductions (VERs) on existing operational plants (700 MW). The company is entitled to 2.3 million VERs per annum on the existing 700 MW project. The realisation from this certificate is close to €3.5-4.0 per VER. JPVL has already sold a part of the VERs that is likely to accrue from existing operational plants over the coming two years.

Exhibit 8: Significant upside expected from the carbon credit market

0

400

800

1200

1600

2000

4/3/

2008

6/3/

2008

8/3/

2008

10/3

/200

8

12/3

/200

8

2/3/

2009

4/3/

2009

6/3/

2009

8/3/

2009

10/3

/200

9

12/3

/200

9

2/3/

2010

Rs. /

CER

Spot price* Assumed price

Source: Company, Bloomberg, ICICIdirect.com Research * Conversion rate of Rs 60 per Euro is assumed for converting the spot rate of CERs

In addition to VERs, the company is eligible to claim the benefit from another certificate called CERs. The management has indicated that projects will also be eligible for carbon credits on the three projects likely to come up in the super critical technology. In all, plants will receive 8.15 million CERs per annum by FY15E. New projects like Karcham Wangtoo, Nigrie, Bara and Karchana are likely to receive registration from the UNFCCC. CERs are trading at a significant premium compared to VERs. We believe that with the commencement of income from CERs, the company will witness a significant boost in operating income. Carbon income under the present mechanism is expected to grow ~11 folds from the present levels of Rs 40 crore in FY10E.

Exhibit 9: Boost in operating income expected from the carbon credit market

8 10 10 10 10 10 1032 27 27 27 27 27 27

251 251 251 251

30 30

94

56

0

100

200

300

400

500

FY09 FY10E FY11E FY12E FY13E FY14E FY15E

Rs C

rore

Baspa Vishnu Prayag Karcham Wangtoo Nigrie Bara Karchana

40 40 40

288 318

468

288


A majority of the projects executed by JPVLencourages the reduction of greenhouse gases. 6Sixout of the seven upcoming projects qualify for thebenefits of carbon credit

Total ~11 fold growth in the income from thecarbon credits business. We have assumed anaverage realisation of Rs 750 per CER and ~Rs 210per VER.

('millions)

Projects Basis VER's CER's

Baspa - II Hydro 1 -

Vishnuprayag Hydro 1.32 -

Karcham Wangtoo Hydro - 3.35Bina Power Thermal - Subcritical - -

Jaypee Nigrie Thermal - Supercritical - 0.8

Karchana Thermal - Supercritical - 1.5

Bara Thermal - Supercritical - 2.5

Total 2.32 8.15


Better operational metrics help sustain better RoE Both operating projects Vishnuprayag and Baspa are required to supply 12% of power free of cost to the respective states. For the remaining 88%, they have entered into long term off take arrangements with respective state utilities. Both PPAs of Vishnuprayag and Baspa provide for a return on equity (RoE) of 16%. In addition to the fixed RoE both projects are receiving benefit from the sale of carbon credits and also qualify for incentives under two different clauses :

a. On the secondary energy (capped @ 10% of RoE), b. On the plant availability in excess of 90% availability (capped @

2% of RoE for BASPA and capped @ 6.6% of RoE)

Exhibit 10: Calculation of core RoE for BASPA and Vishnuprayag Baspa ProjectCalculation of Core ROE

Equity invested 460.2

Return on equity @ 16% 73.6

Incentive on secondary generation 21.0

incentive on higher plant availability 9.0

Income from sale of 40% VER's 9.6

Total Return 113.2

Core ROE (%) 25

Vishnuprayag ProjectCalculation of Core ROE

Equity invested 505.2

Return on equity @ 16% 80.8

Incentive on secondary generation 10.0

incentive on higher plant availability* 26.3

Income from sale of 100% VER's 27.3

Total Return 144.4

Core ROE (%) 29

Source: Company, ICICIdirect.com Research * Incentive on higher plant availability has been calculated assuming availability of 98% Plant availability for Vishnuprayag has been 99.1% in the nine months ended Dec-09 & 98.6% in FY09.

EBITDA to grow more than 4.4 folds in next three years The installed capacity is expected to reach 2,200 MW by FY12E. The incremental capacity will boost the overall EBITDA by over four folds in the next three years. The existing two operational plants (700 MW) will contribute only ~20.7%of the overall EBITDA by FY13E.

Exhibit 11: Project wise EBITDA trend for JPVL

275.8 277.4 268.3 259.5 250.9380.0 370.5 360.5 350.8 341.2

907.91,495.6

356.6

763.2

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

FY09 FY10E FY11E FY12E FY13E

Rs C

rore

Baspa Vishnu Prayag Karcham Wangtoo Bina - I

655.8 647.9 628.9

1,874.7

2,850.8


The existing plants are enjoying a premium core ROEin the range of 25-29% compared to other industryplayers mainly owing to higher incentives andbenefit from the carbon credits market

Incremental installed capacity to give a leg up to theoverall EBITDA for the company


Portfolio backed by equipment from reputed manufacturers All existing operational projects and equipment for upcoming projects are placed with reputed vendors. This provides significant comfort that the plants will be able to achieve the rated output on a sustainable basis. The reputed names in the business would also ensure the deadlines are met.

Exhibit 12: Reputed vendors short listed for expansion plans

Projects Fuel MWBudgeted

CostCost incurred till Dec -

09Expected

CoD Vendors to the projects

Baspa Hydro 300 1,545 1,545 Operational VA Tech, Voith & Alstom

Vishnu Prayag Hydro 400 1,720 1,720 Operational Alstom

Under Construction

Jaypee Power Grid Transmission 217 kms 1,000 492 Dec-10

Karcham Wamgtoo Hydro 1,000 7,150 3,381 May-11 VA Tech, Voith & Areva

Bina - I Coal 500 2,753 420 Nov-11 BTG package ordered with BHEL

Nigrie Coal 1,320 8,118 579 Aug-13 BTG package ordered with L&T-MHI

Bara - I Coal 1,980 11,088 257 Aug-14 BTG package ordered with BHEL -Alstom

Karchana - I Coal 1,320 7,392 110 Dec-14

Under Planning

Bina - II Coal 750 4,125 NA Jul-14

Bara - II Coal 1,320 7,392 NA Sep-15

Karchana - II Coal 660 3,696 NA Mar-16

Lower Siang Hydro 2,700 13,500 114 Mar-16

Hirong Hydro 500 2,500 11 Aug-16

Kynshi - II Hydro 450 2,250 2 Aug-16

Umngot - I Hydro 270 1,350 1 Jul-19


Venturing into transmission sector Jaypee Powergrid, a 74% subsidiary of JPVL, is developing a transmission facility for evacuation of power from the Karcham Wangtoo plant. The project is scheduled to achieve completion by September 2010. However, the revenue from the project will start accruing after the Karcham Wangtoo hydro electric power plant gets operational in April 2011. With the new Tariff policy 2009-14, transmission projects will qualify for an RoE of 15.5% instead of 14%. The total cost of the project is Rs 1,000 crore and it will be funded by a debt equity mix of 70:30. JPVL has already incurred Rs 492 crore till December 2009.

JPVL is entering into a new vertical by venturing intothe transmission sector. The company isestablishing a 217 km long transmission network toevacuate power for its Karcham Wangtoo project


Sustainable higher PLFs for existing plants JPVL can sustain an improved operational performance due to the strategic positioning of operational projects. Both the Baspa and Vishnuprayag plants are operating at levels in excess of design energy. The plants qualify for secondary benefit once they operate at a level in excess of the design energy. Also, the plants were operating at an availability factor of 99.6% for Baspa and 98.6% for Vishnuprayag. Both plants qualify for both incentives that are available to the hydropower projects. The upcoming projects are also expected to sustain a good performance benchmark for the overall industry.

Exhibit 13: Projection for units produced and PLF

131.

5

97.812

8.1

187.

1

129.

2

203.

3

126.

7

191.

4

129.

3

198.

3

129.

3

198.

3

129.

3

198.

3

255.

5

164.

3

49.256.6

50.0

90.0

0

100

200

300

Basp

a

Vish

nuPr

ayag

Karc

ham

Wan

gtoo

Bina

(Kw

h un

its in

cro

res)

-50.0

-25.0

0.0

25.0

50.0

75.0

100.0

FY07 FY08 FY09 Till Feb10 FY10E FY11E FY12E PLF (RHS)

Source: Company, CEA, ICICIdirect.com Research

Long-term contracts in business model provides defensive outlook Total ~61% of the overall expansion capacity (13,470 MW) is tied up under long-term power purchase agreements (PPA). Total 100% of the existing 700 MW hydro projects are tied up for offtake arrangements under the long-term route. Majority of the upcoming plants also have the flexibility of passing the escalation in fuel cost to the beneficiary.

Exhibit 14: Fuel risk controlled effectively by managing the selling arrangements

Projects MW PPA

Capacity tiedunder long

term (%) Tariff Impact

Baspa (Hydro) 300 40+20 100 Regulated returns @ 16% No risk of fuel cost

Vishnu Prayag (Hydro) 400 30+20 100 Regulated returns @ 16% No risk of fuel cost

Under Construction

Jaypee Power Grid (Transmission) Regulated returns @ 15.5% No risk of fuel cost

Karcham Wamgtoo (Hydro) 1000 35+20 80 Regulated returns @ 15.5% No risk of fuel cost

Bina - I 500 25 60* Regulated returns @ 15.5%** Final PPA is expected soon

Nigrie 1320 25 50 Regulated returns @ 15.5%** Captive mines mitigate the fuel risk

Bara - I 1980 25 90 Levelised tariff @ Rs 3.02 per unit Fuel cost escalation is a pass through

Karchana - I 1320 25 90 Levelised tariff @ Rs 2.97 per unit Fuel cost escalation is a pass through

* MOU is signed for 42% of the generation and the company intends to enter into long term arrangements for another 18%

** Assumed Source: Company, ICICIdirect.com Research

Strategic advantages of locations for hydro plantsand asset profile from reputed vendors also helpsthe company in achieving a better operationalperformance

Fuel price risk that is mainly a pass through for amajority of projects along with long-termagreements for power offtake offer a defensiveoutlook


Risks & concerns

Execution risk Jaiprakash Power Ventures Ltd (JPVL) has a significant number of projects that are at a nascent stage. The company is yet to enter into definitive EPC contracts for Karchana, projects in Arunachal Pradesh and projects in Meghalaya. The company will have to encounter the limitation prevalent at the time of placing the final order. Adverse changes in regulatory regime for projects under long-term PPA Any adverse changes in the regulatory regime may significantly impair the ability of the company to generate returns. The returns for the Baspa project are calculated based on the tariff policy of Himachal Pradesh Electricity Regulatory Commission (HPERC). Delays in upcoming projects Hydropower projects typically require long gestation periods. The completion of the project is also dependent on several factors like requisite licenses, approvals, permit, natural disasters, labour disputes and adverse weather conditions. The company may be unable to complete the projects in time. This, in turn, will lead to cost escalations of the projects. Also, for a few thermal projects the company has placed equipment orders with the company that are in process of setting up their plants in India. The company may face delays on account of vendors being unable to fulfil their equipment order in time. Unforeseen delays in project commissioning will, hence, hamper the future growth as well. Operational risk The generation of energy by the hydro power plant is primarily dependent on water availability in respective rivers. In case the availability of the plant falls below the prescribed norm for any operational year, the revenues will be adversely impacted. In addition, the company will face operational challenges in thermal power projects as it has no track record of operating big thermal power projects. Dilution risk The company has a lot of projects under development and the free cash flow may not be enough to fund the expansion plans. The company may look to raise further capital for funding the expansion plans diluting the existing capital base of the company. Merchant tariff risk At present, JPVL is not operating any capacity under the merchant route. Over the next two years, JPVL is expected to add ~376 MW at Karcham Wangtoo and Bina – I under the merchant set-up. A large part of the upcoming capex is dependent on internal accruals that the company is likely to generate over the coming years. For our projection purpose, we have assumed the merchant tariff for hydro power plants are expected at Rs 6.11, Rs 5.23 and Rs 4.95 per unit in FY11E, FY12E and FY13E, respectively. Subsequently, we are expecting the rates to correct gradually to Rs 3.75 levels in FY17E. For thermal power plants, we have assumed Rs 4.75, Rs 4.50 and Rs 4.00 in FY11E, FY12E and FY13E, respectively. Subsequently, we are expecting the rates to correct gradually to Rs 3.40 levels in FY17E. Any volatility in merchant tariffs will pose a risk to our earnings estimate.

A large number of projects are under theimplementation stage. This exposes the company toexecution risk


Financials

Topline to receive a leg up from capacity addition We expect adjusted revenue CAGR of 48% from Rs 716 crore in FY09 to Rs 3,476 crore in FY13E. The company is expected to commission another ~1,500 MW by FY12E. The overall installed capacity will increase to 2,200 MW. The existing operational capacity of ~700 MW will contribute only ~19% to the overall topline by FY13E. Total ~375 MW will be open for trading in the merchant route. Exhibit 15: Significant visibility of growth in installed capacity adding to the topline

300.8 304.3 296.3 288.6 281.1415.0 400.5 391.7 383.2 374.9

980.61,625.2

529.3

1,195.0

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0


Rs C

rore

Baspa Vishnu Prayag Karcham Wangtoo Bina - I

715.8 704.8 688.0

2,181.7

3,476.3


EBIDTA margin to contract owing to change in fuel mix

At present, JPVL has ~700 MW of hydro-based operational capacity. The EBITDA is expected to grow at a CAGR of 44% over the next four years from Rs 656 crore in FY09 to Rs 2,851 crore in FY13E. Historically, the company has been able to operate at EBITDA margins of ~92% in FY09. With the commencement of thermal capacity in FY12E the margins are likely to contract. Exhibit 16: Substantial growth in EBITDA expected

655.8 647.9 628.9

1874.7

2850.8

91.6 91.9 91.4

82.0

85.9

0

500

1,000

1,500

2,000

2,500

3,000


Rs C

rore

s

75

78

81

84

87

90

93

(%)

EBITDA EBITDA Margins (%)


Substantial growth in topline of over 4.8 folds in fouryears on the back of significant increase in installedcapacity

We expect the company to report over 4.3 fold growth in EBITDA from FY09 to FY13E led by a spate of capacity additions, which are likely to go on stream over the next ~24 months


Balance sheet to double from FY10E to FY12E

The balance sheet is likely to witness ~4.6 fold jump from FY08 to FY10E owing to amalgamation between group companies. We believe the company will be able to double the balance sheet size over the next two years from FY10E to FY12E owing to growth in installed capacity. The company is in the capex mode and will increase the installed capacity by over 3.1 fold from 700 MW to ~2,200 MW. Exhibit 17: Robust growth in balance sheet size

1,967.4 2,113.8

8,992.6

13,357.4

18,160.2

325.4

7.4

48.5 36.0

02,500

5,0007,500

10,000

12,50015,000

17,50020,000

FY08 FY09 FY10E FY11E FY12E

Rs C

rore

s

0

50

100

150

200

250

300

350

(%)

Total Balance Sheet Growth


Net debt to equity to remain under control post conversion of FCCB

JPVL is still in capex mode and will continue to draw substantial amounts of debt over the next three years in order to increase the installed capacity. The debt infusion will continue to burden the debt equity profile of JPVL. We believe that post the conversion of the recently issued FCCB, the debt: equity ratio will remain under control. Overall debt includes the US$200 million (~Rs 920 crore) FCCB issued for funding their expansion plans. FCCBs have a conversion price of Rs 85.8 and are eligible for conversion from FY11E. Post conversion, net debt: equity will stay at 2.3. Exhibit 18: Net debt to equity to remain under control post conversion of the FCCB

Pre conversion

0.7

0.7 0.9

2.2

3.0

0

2,500

5,000

7,500

10,000

12,500

15,000

17,500

FY08

FY09

FY10

E

FY11

E

FY12

E -1.00

0.00

1.00

2.00

3.00

4.00

Net Debt - Rs Cr (LHS)Equity - Rs Cr (LHS)Net Debt : Equity (x) - (RHS)

Post conversion

0.7

2.3

1.5

0.50.

7

0

2,500

5,000

7,500

10,000

12,500

15,000

17,500

FY08

FY09

FY10

E

FY11

E

FY12

E -1.00

0.00

1.00

2.00

3.00

4.00

Net Debt - Rs Cr (LHS)Equity - Rs Cr (LHS)Net Debt : Equity (x) - (RHS)


The balance sheet is likely to witness a 4.6 fold jump from FY08 to FY10E owing to amalgamation between group companies. The company will be able to nearly double the balance sheet size over the next two years from FY10E to FY12E owing to growth in installed capacity

We believe the company will be able to successfully convert the outstanding FCCB. FCCBs are due for redemption only by 2015. This gives the company ample time and the spread between the conversion price and the existing CMP is not significant


Profitability set to grow significantly after a lull After a small blip in 2009, the profitability is set to grow led by amalgamation. For our modelling purpose, we have assumed that the income from the sale of carbon credit will accrue with the commencement of operations at the respective plant. Profitability is set to grow with incremental capacities coming on stream. Exhibit 19: Growing profits to augur well for shareholders

146 143 221 271

644-2.3

54.9

22.4

137.7

0

200

400

600

800

1,000

FY08 FY09 FY10E FY11E FY12E(20)020406080100120140160

PAT excl extraordinary items Growth (%)


Improving outlook for return ratios JPVL is in advanced stages of commissioning ~1,500 MW capacity over the next 24 months. The overall asset turnover has reduced due to build up in CWIP and is dragging the overall return on equity. The return ratios are expected to again scale back to highs subsequent to the plant commissioning. Exhibit 20: Return ratios improving subsequent to addition in the installed capacity

20.85%

13.29%

7.48%

15.10%

12.23% 11.78%6.60%

10.73%

5.50%

11.98%

0%

5%

10%

15%

20%

25%

30%

35%

FY08 FY09 FY10E FY11E FY12E

ROE ROCE


Profitability is set to grow ~4.5 folds over the three year period from FY09 to FY12E

Return ratios are expected to scale back to earlierhighs post the commissioning of Karcham Wangtooproject.


Valuations

At the CMP of Rs 67, the stock is offering ~6.2% upside potential. JPVL has 700 MW of plants operational, which comprises Rs 17 per share and ~24% in the overall value. The expansion plans form the remaining portion of the overall value. JPVL continues to be on a firm footing when it comes to their expansion plans. We believe the expensive valuation is justified owing to the demonstrated capability of the Jaypee group. The expansion plans will start to bear fruit from FY12E. JPVL can be considered a defensive counter at lower levels considering the robust utility business, which provides for long-term visibility.

Exhibit 21: JPVL’s fair value based on SOTP model

71

89

85

1

64 6

3 0 0 0 2

97

0

20

40

60

80

100

Basp

a

Vish

nu P

raya

g

Karc

ham

Wam

gtoo

Bina

- I

Bina

- II

Nig

rie

Bara

- I

Bara

- II

Karc

hana

- I

Karc

hana

- II

Low

er S

iang

Hiro

ng

Kyns

hi -

II

Umng

ot -

I

Jayp

ee P

ower

Grid

Tota

l Val

ue

Rs p

er s

hare


The historical financials of the company are not depictive considering a miniscule installed capacity compared with the overall expansion plans. JPVL has only 700 MW of plants operational, which comprises ~21% of the overall value. JPVL is the flagship company from the Jaypee group. Considering the execution record of JAL, it provides comfort with respect to their existing expansion plans. Delays in execution of any project may impact our valuation case. Exhibit 22: Project wise valuation for the power vertical

Bara - IBara - II

Karchana - I

Karchana - II

Lower Siang

Nigrie

Bina - II

Bina - I

Baspa

Umngot - I

Jaypee Power Grid

Kynshi - II

Vishnu Prayag

Karcham Wamgtoo

Hirong


The existing price is already discounting the growthplans for the company. Considering the defensivebusiness model for JPVL one can continue toaccumulate the counter on downturns

JPVL has shown competency by winningcompetitive bids at lucrative rates in Bara andKarchana.


Exhibit 23: Valuation table of the generation and transmission vertical

Projects FuelCapacity

(MW)Project

CostOwnership

(%)JPVL's share

(MW)Value per

shareEquity Value -

JPVLM Cap / MW

(Rs Cr)Cost of

Equity (%)Baspa Hydro 300 1,545 100 300 8 1,580 5.3 12Vishnu Prayag Hydro 400 1,720 100 400 9 1,927 4.8 12Karcham Wamgtoo Hydro 1,000 7,150 57 569 8 1,729 3.0 13Bina - I Coal 500 2,753 100 500 5 1,109 2.2 13Bina - II Coal 750 4,125 100 750 1 243 0.3 13Nigrie Coal 1,320 8,118 100 1,320 9 1,951 1.5 13Bara - I Coal 1,980 11,088 100 1,980 7 1,530 0.8 13Bara - II Coal 1,320 7,392 100 1,320 6 1,307 1.0 13Karchana - I Coal 1,320 7,392 100 1,320 4 915 0.7 13Karchana - II Coal 660 3,696 100 660 6 1,244 1.9 13Lower Siang Hydro 2,700 13,500 89 2,403 3 733 0.3 16Hirong Hydro 500 2,500 89 445 0 83 0.2 16Kynshi - II Hydro 450 2,250 74 333 0 57 0.2 16Umngot - I Hydro 270 1,350 74 200 0 50 0.3 16TransmissionJaypee Power Grid Transmission 217kms 1,000 76 165 kms 2 513Total 13,470 75,579 12,500 71 14,970 1.2


For valuing the transmission sector we have assigned a book value multiple of 2.25x. This gives the transmission venture an overall value of Rs 675 crore for the entire stake while JPVL is holding 74% stake in the venture. The power sector is witnessing heightened activity and will continue to offer new opportunities over the coming decade. Post commissioning of 1,500 MW capacity in the next two year, JPVL will become one of the leading private sector generation companies. The existing plants will contribute to the free cash flow generation, which can be further deployed in growth opportunities. Strong execution track record of the parent company provides the competitive edge to JPVL with regard to executing the present pipeline and catering to the upcoming opportunities. Thus, we are initiating coverage on the stock with an ADD rating.


Exhibit 24: Profit and Loss Account

Rs Crore FY08 FY09 FY10E FY11E FY12ESales 300.8 296.7 704.8 724.0 2405.2Growth (%) -8.6 -1.4 137.6 2.7 232.2Op. Expenditure 25.1 23.4 56.9 59.2 307.0EBITDA 275.7 273.3 647.9 664.9 2098.2Growth (%) -9.3 -0.9 137.1 2.6 215.6Other Income 41.7 21.2 15.0 49.0 88.0Depreciation 45.9 47.0 86.7 85.2 309.0EBIT 271.5 247.5 576.2 628.7 1877.2Interest 99.3 81.9 267.3 269.1 753.3PBT 172.2 165.6 308.9 359.6 1124.0Growth (%) -23.5 -3.8 86.5 16.4 212.6Tax 27.3 15.6 85.7 88.6 260.9Extraordinary Item 68.4 -7.0 0.0 0.0 0.0Rep. PAT before MI 213.4 142.9 223.2 270.9 863.0Minority interest (MI) 0.0 0.0 0.0 0.0 219.0Rep. PAT after MI 213.4 142.9 223.2 270.9 644.1Adjustments 0.0 0.0 0.0 0.0 0.0Adj. Net Profit 213.4 142.9 223.2 270.9 644.1Growth (%) 12.9 -33.0 56.1 21.4 137.7

(Rs Crore)


Exhibit 25: Balance sheet

Rs Crore FY08 FY09 FY10E FY11E FY12E Equity Capital 491.0 491.0 2095.7 2095.7 2095.7Share Warrants 0.0 0.0 0.0 0.0 0.0Reserves & Surplus 539.5 584.2 1255.5 1526.4 2170.5Shareholder's Fund 1030.5 1075.2 3351.2 3622.1 4266.2Minority Interest 36.8 49.8 336.2 490.4 709.4Borrowings 286.5 191.6 3819.9 7767.5 11715.2Unsecured Loans 543.1 719.7 1267.5 1259.5 1251.5Deferred Revenue 70.6 77.6 217.9 217.9 217.9Source of Funds 1967.4 2113.8 8992.6 13357.4 18160.2Gross Block 1722.7 1848.7 4746.7 4746.7 13896.7Less: Acc. Depreciation 217.2 264.1 350.8 436.0 745.0Net Block 1505.5 1584.6 4395.9 4310.8 13151.7Capital WIP 90.2 195.6 2195.6 7595.6 3845.6Net Fixed Assets 1595.7 1780.2 6591.5 11906.3 16997.3Intangible asset 0.0 0.0 0.0 0.0 0.0Investments 0.0 55.9 1414.0 1000.0 50.0Cash 96.1 123.7 731.4 198.2 294.5Trade Receivables 214.4 120.6 150.6 132.3 572.3Loans & Advances/Other 177.5 182.8 250.6 266.3 415.5Inventory 5.0 4.9 0.0 0.0 0.0Total Current Asset 492.9 432.0 1132.6 596.8 1282.3Current Liab. & Prov. 121.2 154.2 145.5 145.7 169.4Net Current Asset 371.7 277.8 987.1 451.1 1112.9Application of funds 1967.4 2113.8 8992.6 13357.4 18160.2

(Rs crore)



Exhibit 26: Cash Flow statement

Rs Crore FY08 FY09 FY10E FY11E FY12E Net Profit after Tax 213.4 142.9 223.2 270.9 644.1Other Non Cash Exp -1.5 0.0 1.8 0.0 0.0Depreciation 45.9 47.0 86.7 85.2 309.0Direct Tax Paid 27.2 15.6 85.7 88.6 260.9Other Non Cash Inc 0.0 0.0 0.0 0.0 0.0CF before change in WC 380.6 278.9 717.4 625.2 1925.3Inc./Dec. in WC 51.0 121.5 -103.5 2.9 -565.4CF from operations 431.6 400.4 613.9 628.1 1359.9Pur. of Fix Assets -52.9 -231.5 -4898.0 -5400.0 -5400.0

Pur. of Inv 0.0 0.0 -1358.1 414.0 950.0CF from Investing -52.9 -231.5 -6256.1 -4986.0 -4450.0Inc./(Dec.) in Debt -193.2 -85.0 4176.1 3939.7 3939.7Inc./(Dec.) in Net worth 0.0 0.0 2341.1 154.2 0.0Others -185.5 -81.9 -267.3 -269.1 -753.3CF from Financing -378.7 -166.9 6249.9 3824.8 3186.4Opening Cash balance 59.4 96.1 123.7 731.4 198.2Closing Cash balance 96.1 123.7 731.4 198.2 294.5

(Rs crore)


Exhibit 27: Key Ratios

(%)FY08 FY09 FY10E FY11E FY12E

Raw Material 0.0 0.0 0.0 0.0 6.0Operation & maint exp. 8.4 7.9 8.1 8.2 12.8Income from CER's/VER's 0.0 2.6 5.2 5.1 12.0

Effective Tax rate 15.8 9.4 27.8 24.7 23.2

Profitability ratios (%)EBITDA Margin 91.6 92.1 91.9 91.8 87.2PAT Margin 70.9 48.2 31.7 37.4 35.9

Per share data (Rs)Revenue per share 1.4 1.3 2.9 3.0 10.0EV per share 46.9 46.3 58.9 77.5 93.6Book Value 20.9 21.9 16.0 17.3 20.4Cash per share 0.4 0.6 3.0 0.8 1.2EPS 1.0 0.7 0.9 1.1 2.7Cash EPS 1.9 1.6 1.3 1.5 4.2DPS 0.8 0.8 0.0 0.0 0.0



Exhibit 28: Key Ratios (%)

Return ratios FY08 FY09 FY10E FY11E FY12ERoNW 20.9 13.3 6.6 7.5 15.1ROCE 12.2 11.8 10.7 5.5 12.0ROIC 15.1 13.3 8.7 5.3 10.7Financial health ratioOperating CF (Rs Cr) 431.6 400.4 613.9 628.1 1359.9FCF (Rs Cr) 246.5 147.6 -4439.4 -4820.9 -4128.1Cap. Emp. (Rs Cr) 1846.1 1959.6 8847.1 13211.8 17990.7Debt to equity (x) 0.8 0.8 1.5 2.5 3.0Debt to cap. emp. (x) 0.4 0.5 0.6 0.7 0.7Interest Coverage (x) 1.7 2.0 1.2 1.3 1.5Debt to EBITDA (x) 3.0 3.3 7.9 13.6 6.2DuPont ratio analysisPAT/PBT 1.2 0.9 0.7 0.8 0.6PBT/EBIT 0.6 0.7 0.5 0.6 0.6EBIT/Net sales 0.9 0.8 0.8 0.9 0.8Net Sales/ Tot. Asset 0.1 0.1 0.1 0.1 0.1Total Asset/ NW 2.0 2.1 2.7 3.7 4.3



(x times)Working Capital FY08 FY09 FY10E FY11E FY12EWorking cap./Sales (%) 123.6 93.6 140.1 62.3 46.3Inventory turnover NA NA NA NA NADebtor turnover 1.3 1.7 5.2 4.9 6.2Creditor turnover 10.8 45.4 205.6 123.6 124.3Current Ratio 4.1 2.8 7.8 4.1 7.6



(Rs crore)

FCF CalculationEBITDA 275.7 273.3 647.9 664.9 2098.2Less: Tax 27.3 15.6 85.7 88.6 260.9NOPLAT 248.4 257.6 562.2 576.2 1837.3Capex -52.9 -231.5 -4898.0 -5400.0 -5400.0Change in working cap. 51.0 121.5 -103.5 2.9 -565.4FCF 246.5 147.6 -4439.4 -4820.9 -4128.1

Source: Company, ICICIdirect.com Research Exhibit 31: Key Ratios Valuation (x times)

FY08 FY09 FY10E FY11E FY12E PE (x) 47.4 70.8 49.5 40.7 17.1EV/EBITDA (x) 39.3 39.9 23.8 29.9 11.3EV/Sales (x) 36.0 36.7 21.8 27.4 9.9Dividend Yield (%) 1.6 1.6 0.0 0.0 0.0Price/BV (x) NA NA 3.3 3.0 2.6



Annexure

Exhibit 32: Pre and Post corporate structure for Jaiprakash Associate

Pre Amalgamation Post Amalgamation

63.30% 80.60% 76.30%

Jaiprakash Associates Ltd. Jaiprakash Associates Ltd.

Jaiprakash Hydro Power (JHPL)

100% - Baspa - 300 MW51% - Jaypee Power Grid

Jaiprakash Power Ventures (JPVL)

100% - Vishnuprayag - 400 MW100% - Nigrie - 1,320 MW23% - Jaypee Powergrid56% - Karcham Wangtoo -1,000MW100% - Bina Power - 1,250 MW100% - UP Power projects - 5,280 MW89% - Arunachal projects - 3,200 MW74% - Meghalaya Projects - 720 MW

Jaiprakash Power Ventures (JPVL)

100% - Baspa - 300 MW100% - Vishnuprayag - 400 MW100% - Nigrie - 1,320 MW74% - Jaypee Powergrid56.4% - Karcham Wangtoo -1,000 MW100% - Bina Power - 1,250 MW100% - UP Power projects - 5,280 MW89% - Arunachal projects - 3,200 MW74% - Meghalaya Projects - 720 MW



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Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor , Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai – 400 093

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ICICI Securities Limited has been mandated to act as one of the Book Running Lead Managers to manage the IPO of the subsidiary of Jaiprakash Associates, viz., JP Infratech Limited. This report is prepared on the basis of publicly available information.

march 23, 2010 jaiprakash power ventures ltd...

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