SJVN Ltd - CMP 20-21

SJVN Ltd, one of the largest hydroelectric power companies in India, is trading at a relatively cheap valuation compared to its peers Jaiprakash Power Venture and NHPC. The Company is expected to benefit from the robust investment earmarked for the infrastructure sector, led by power sector, during the 12th Plan Period. SJVN's robust performance is explicit from the fact that the Company has been consistently able to meet and exceed the power generation target set by Power Ministry from the Nathpa Jhakri Hydro Power Station. To impart stability to its topline, the Company is diversifying into other lines of power generation such as Wind Energy and Solar Energy, as also venturing into power trading and transmission. SJVN has a number of projects scheduled to come on-stream from 2013 which will translate into a spurt in the Company's topline growth. I expect the Company's operating revenue to remain stable and a high double digit. The stock is available at an attractive valuation at 1.30x its FY10 consolidated Book Value and 1.31x is expected FY11 consolidated Book Value. At their current prices (as on 4 feb 2011), compared to JP Power and NHPC which are trading at 48.28x and 16.40x respectively their consolidated FY10 EPS, SJVN is trading at 9.4x its consolidated FY10 EPS.  I expect a 40-50% appreciation in the stock price from the current levels over the medium to long term period. I recommend a BUY on the stock with a price target of Rs.35 with a medium to long term perspective.  

Company Profile 

SJVN Limited engages in the generation and sale of hydroelectric power in India. The company principally holds a 1,500MW Nathpa Jhakri Hydro Power Station located in the state of Himachal Pradesh. It also provides various construction and consultancy services. The company was formerly known as Satluj Jal Vidyut Nigam Limited and changed its name to SJVN Limited in September 2009. SJVN Limited was incorporated in 1988 and is based in New Shimla, India. 

Financials

 

Profit and Loss

Cash Flow Summary

Investment Argument

Robust Investments Target in Infrastructure Sector to be led by the Power Sector: 

The Indian Planning Commission has set the ambitious target of $1 trillion (Rs.45 Lakh Cr) investment in the power sector for the 12th Plan Period (2012-2017). The total investment in the power sector including generation work in progress is estimated to be around $300 bn (R. 13.5 Lakh Cr), which is 30% of the overall target. The Planning Commission estimates capacity addition of around 100,000 MW during the plan period, which will result in investment of at least $100 bn in the sector. Similar investment to the tune of $100bn is expected in distribution and transmission with overall investment, including generation work in progress currently, being put at $300 bn.


Robust Industry Growth Expected 

The investment in infrastructure during the 11th Plan has reached 7.18% of GDP and is expected to reach 8.37% by 2011-12. In the 12th Plan, the Commission expects infrastructure investment to constitute around 10% of GDP, if the Indian economy grows at an average annual growth rate of nine%. The Indian power sector is expected to witness robust and consistent investments in a bid to achieve the target of $1 trillion (Rs.45 lakhCr) investment in infrastructure set by the Planning Commission for the 12th Plan Period (2012-17). Power sector investments will guide this ambitious yet achievable target for the infrastructure sector as a whole.

The entire investment in the power sector itself, including generation work in progress, has been estimated to be in the region of $300bn (Rs 13.5 lakhCr). According to the Commission India will witness an estimated capacity addition of around 100,000 MW during the period at an average cost of at least Rs.5Cr for every MW added. Consequently, the capacity addition will result in investment of no less than $100bn. Similar investment of around $100bn is expected in distribution and transmission during the 12th plan period along with overall investment, including generation work in progress currently, amounting to almost $300bn, which is around 30% of the overall target.

In the 11th Plan period (2007-12), the Commission had estimated an investment of $147.8bn in the power sector which was revised marginally downwards to $146.05bn in the mid-term appraisal. Even as investments in the sector have broadly kept pace with the set target, in capacity addition the sector is likely to see a 26.2% drop to an addition of only 62,374 MW by the end of the Plan period (March 2012), as against an original target of 78,700 MW.

Achieved Higher than Production Target set by Power Ministry 

The Company has been able to achieve record power generation from the Nathpa Jhakri Hydro Power Station (NJHPS).The Country's largest Hydro Electric Power Project, the NJHPS (capacity 1500 MW) surpassed 6000 MUs generation in November 2010, which exceeded the targets of MoU provided by the Power Ministry under excellent category, by 178 MU, ahead of its due date set in December 2010. The Company has been able to achieve this record power generation despite the plant shut down for 22 days on account of high silt during July & August 2010 resulting from the unprecedented rains in the catchment of river Satluj, on the back of efficient water and machine management.

During FY10 as well, the Power Station had achieved a record generation of 7019 MUs which was 407 MUs more than the design energy of 6612 MUs.  During the current financial year, FY11, the power station has set its power generation target at 6700 MU of electricity, of which it has already achieved 6000 MU generation. The power station has so far generated 42180 MU during 7 years of its commencement of commercial power generation.

Steady and Secured Revenue Stream Ensured 

The NJHPS supplying power to the 9 northern grid states - Haryana, Himachal Pradesh, Jammu & Kashmir, Punjab, Rajasthan, Uttar Pradesh, Uttarakhand, Chandigarh & Delhi. The Company has entered into 14 power purchase agreements with state utilities in the Northern India, as well as the Government, under which 88% of the power generated by the NJHPS is sold to state electricity boards. Rest 12% of SJVN's annual generation is allocated to the state of Himachal Pradesh, free-of-charge. Payment for the sales of electricity to the state utilities are highly secured in nature as they are backed by forms of credit support such as letters of credit issued by reputable financial institutions or by state government guarantees.

4000 MW Capacity to Come On Stream  

SJVN operates the Naphtha Jhakri project with a capacity of 1,500 MW and has about 4,000 MW forthcoming in various places which are at various stages of completion. The first of these expected to go on stream is the Rampur project with a capacity little over 400 MW. SJVN has a 900 MW project in Nepal and two projects totaling to about 1,400 MW in Bhutan. The projects are expected to commence operations during the next 6-7 years. The Company has projects lined up to 2020.

Diversifying Into Wind Power & Solar Power 

The Company intends to diversify into various alternatives such as wind power, solar power and power transmission and power trading. SJVN has already obtained approval of its board to engage professional consultancies with the appropriate technical knowhow and expertise, with the objective of identifying any suitable business opportunities in wind energy projects. The Company has also agreed to take a minority stake in a joint venture company with certain other private sector parties for the development of an 86-kilometer power transmission line connecting India and Nepal. SHVN is also exploring the possibilities of entering the business of power trading.

In June 2009, the Company entered into a memorandum of agreement with Infrastructure Leasing & Financial Services Ltd (ILFS), the Power Grid Corporation of India Limited (PGCIL), and PTC Financial Services Ltd (PTC), for the establishment of a joint venture to construct and maintain the Indian part of a transmission line connecting Nepal and India. The aggregate length of this transmission line is 86 kilometres (approximately).

SJVN will hold 26% equity interest in the joint venture, with ILFS, PGCIL and PTC contributing to 37%, 26% and 11%, respectively of total equity.

Earning & Margin Expectations. 

Despite the long gestation periods particular to hydro power projects, I expect the Company to see steady growth in earning for the next couple of years and a spurt in income 2013 onwards as its projects start to come on stream one after the other.  Post commencement, these projects hardly incur any recurring costs and the operating profit margin has the potential to stabilize at as high as 80-90%.

Key Financial Ratios

Dupont Analysis

Shareholding Pattern

Valuation & Recommendation 

The fundamentals of the Company look strong. Low debt-equity ratio, stable topline and bottomline growth and steady margins are some of the attributes that make the valuations look attractive. I expect the bottomline to grow at a CAGR of over 10% during the next few years.

I believe that the stock is undervalued and has the potential to appreciate considerable from the present levels. 40-50% appreciation in the stock price from the current levels over the medium to long term period is expected.

I have used DCF valuation to arrive at the price target taking a 1% terminal growth rate and a 13.3% weighted average cost of capital. 

2 Phase Buying Strategies Suggested [Always buy in SIP ways]

ü  1^st Phase  : Buy at the current price range Rs 20 – 21 [70% of investment]

ü  2^nd Phase : Add if the price falls down to Rs 16 - 18 [30% of investment]

PATIENCE IS THE KEY TO SUCCESS! HAPPY INVESTING!!!

The recommendation made herein does not constitute an offer to sell or solicitation to buy any of the securities mentioned. No representation can be made that recommendation contained herein will be profitable or that they will not result in loss. Information will be profitable or that they will not result in loss. Information obtained is deemed to be reliable but do not guarantee its accuracy and completeness. Readers using the information contained herein are solely responsible for their action.