Will Raising Funds Add Value For Jaiprakash Power Ventures?

Private sector power company, Jaiprakash Power Ventures (JPVL), after declaring its Dec 2012 quarter results, has said that its shareholders have approved a resolution to raise an additional Rs 3500 crore. The company will raise these funds through various routes like Qualified Institutional Placements (QIP), External Commercial Borrowings (ECB), Foreign Currency Convertible Bonds (FCCB) or Depositary Receipts. It may also use other options such as Follow-On Public Offers (FPO) or issuance of preference shares.

The company is currently in massive capacity expansion mode, with 4300 MW capacity under implementation. It has a current operational capacity of 1950 MW, and aims to operate a total of 6250 MW by 2016. This capacity addition is in line with the current developments in the power sector.

The plans to raise funds for this capacity expansion, however, may cause some problems for the company. As per its Sept 2012 quarter balance sheet, JPVL has a total debt of Rs 15301 crore and a debt-to-equity ratio of 2.6x. This means that its debt and equity proportion to around 72:28. However, as per the Central Electricity Regulatory Commission’s (CERC) regulations, power companies are required to maintain debt and equity in the proportion of 70:30. Recently, Tata Power was downgraded on its long-term bonds due to a rise in this ratio.

If JPVL raises additional debt, its debt component would shoot up – the addition of Rs 3500 crore of debt will see its total debt touching Rs 18800 crore (0.76x of total capital structure, debt-to-equity ratio at 3.2x). In such a case, it would be required to raise the equity component. If the company decides to issue shares, at the CMP of Rs 36.75 it will have to offer a total of 95 crore shares. This will dilute 35% of its current equity base. While the debt component will increase the interest outgo, the issuance of equity shares will dilute the earnings available to shareholders (EPS). Either way, shareholders will see a decline in the share price.

The company currently operates 1700MW of hydro-power generation projects, which have shown a poor performance during the quarter due to lower water levels. For the quarter, it has reported a net loss of Rs 97 crore, which is due to the higher cost of fuel and higher depreciation during the quarter.

JPVL currently seems a risky bet with no clear upside. On the valuations front, the stock looks expensive at the EV/EBITDA ratio of 9.6x and a trailing 12-month Price-to-Earnings ratio of 23x. Besides, additional fund raising will trigger a decline in earnings, which would make this stock further expensive and unattractive. The company has not declared dividends for the last three years either. Though fund raising is required for capital expansion, shareholders may not see any value addition. Hence, investors should avoid the stock.