SJVN: Powering ahead

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India’s total installed capacity of hydro power is about 35,000 Mw as against a potential of 1,50,000 Mw. This gap is expected to shrink substantially as the sector is gaining attention and attracting higher investments. In fact, India's total hydro electric capacity is expected to reach 1,48,000 Mw by the 14th Five Year Plan ending 2027.

Companies like SJVNL, which have experience and execution capabilities along with a strong balance sheet, will be a key beneficiary. SJVNL has an installed capacity of 1,500 Mw and is developing projects equivalent to 3,588 Mw, which will take its capacity to 5,500 Mw by 2016-17. The public sector hydro power generator, SJVN, is coming out with an initial public offer (IPO) and could be a good investment in the green energy space.


Growth through diversification
Besides growth coming from new capacities, SJVNL’s diversification into project consultancy, power trading, transmission and wind and solar energy should augur well in the long run. It is also pursuing power projects outside India and has bagged a 900-Mw project from the Nepalese government, which will have over 70 per cent of merchant power. Along with other projects, the company will scale its merchant power portfolio in the long run, which will further lead to higher return on equity (RoE).

Operational efficiencies
The company has consistently achieved a higher plant availability and output as against the benchmark set by CERC, the national power regulator. As a result of this, its current plant RoE is about 19 per cent as against the CERC's prescribed new RoE of 15.5 per cent. Recently, the regulated RoE, which a plant is allowed to earn, has also been increased from 14 per cent to 15.5 per cent, which should lead to higher cash flow for SJVNL. On this count, the company expects to get about Rs 200 crore of arrears as the new RoE norms are effective April, 2009.

Conclusion
Overall, considering that SJVNL is a large player in the hydro power sector, as well as its ongoing capacity expansion and diversification, the IPO is a good opportunity for long-term investors. Additionally, at the upper price band (Rs 23-26), the issue is attractively priced at about 10 times its annualised earnings of 2009-10 and 1.2 times its estimated book value.

What is even exciting is that the valuation does not include the Rs 3.6 cash per share in the books. While the company’s consistent dividend paying track record provides comfort, at the upper band of Rs 26, the dividend yield itself is fairly good at about 3 per cent. Maintaining its dividend record should not be an issue, given that the company generates operating cash of over Rs 1,500 crore annually, which should only increase as new projects go on stream.

Importantly, the IPO valuations are also attractive. NHPC's IPO at the upper price band was offered at 30 times its earnings and twice its book value. Also, NHPC's overall RoE was just about 7 per cent compared to SJVNL having an overall RoE of 12.5 per cent. Nevertheless, retail investors will also get a 5 per cent discount on SJVNL’s allotment price. Subscribe.

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