JSW’s power play

Like his boss and JSW Group chairman Sajjan Jindal, 47-year-old JSW Energy joint managing director and CEO Prashant Jain seems rather calm amidst the turmoil swirling around the power sector. The sector has been witnessing a bloodbath for the past couple of years, with many established players either finding themselves in the National Company Law Tribunal (NCLT) like Lanco, or having little money left to make further investments. While the reasons are diverse—from unwillingness of the state distribution companies (discoms) to make timely payments, to absence of fuel-supply agreements and long-term private-public sector partnerships, and the failure to get forest and environmental clearances—the results have been disastrous. And consolidation seems to be the name of the game today.

“I remain confident about the future of the power sector in the country,” says the super fit movie buff with a smile, sitting in his second floor cabin in JSW’s corporate office at Mumbai’s Bandra Kurla Complex. His confidence stems from the fact that the current overcapacity of nearly 30,000 MW will get over in the next two-three years, after which the country will start facing a power shortage for the next two-three years, before new capacities kick in. After all, every year India’s power consumption goes up by nearly 15,000 MW, even if we assume that India’s gross domestic product will grow by 7% and auxiliary power consumption goes up by 10%. “Unless companies start ramping up their capacities right now, India will face power shortage in the next three-four years, because unlike renewables, thermal plants need three-five years to come on stream,” he says.

Currently, JSW’s power play is 4 GW, a mix of thermal (more than 90%), and hydroelectric energy. But, since he took over in June 2017, Jain has been hard at work to change his company’s fortunes. First, he has moved away from selling power on the spot market and entered into long-term power purchase agreements (PPAs) instead. “From a 20-year cash flow perspective, I am better off having a low price for a longer period than a spike in prices for two or three years,” he says. And there are other benefits in having long-term PPAs. Not only can the company pass on any rise in fuel costs, but it is also saved from the swings in prices in the spot market depending on the demand-supply situation. Today, 82.3% of the total power produced by JSW Energy is tied up in long-term PPAs compared to around 64% in FY 17.

Second, he is also busy improving the financial health of his company. In the third quarter of FY19, his debt-to-equity ratio came down to a healthy 1: 0.9 and interest cost was down by 13% vis-à-vis a year ago. More importantly, the company’s earnings before interest, tax, depreciation and amortisation (Ebitda) went up by 20% to ₹809 crore and profit after tax went up 212%. “Our target is not about adding capacity but having a double-digit internal rate of return—around 14%,” he says.

Moreover, the company had a free cash flow of ₹1,700 crore (in Q3 of FY19), which would come in handy as it goes in for an acquisition drive. “We are looking both at distressed assets in the NCLT and those outside it,” says Jain, refusing to name any of the targets. But for any acquisition to happen, it will need to meet two important conditions: First, the plant has to be a low-cost producer of power, to ensure that the landed cost (which takes into account transmission charges) is around ₹4.10 per unit, and second, it should have a long-term PPA. “Then only will the discoms come to me because I will be” producing power at the lowest cost, says the mechanical engineer, who has been an executive assistant to the JSW Group chairman.

But he is sure that in the next few years, the consolidation in the power sector will intensify as more and more bankrupt companies look for buyers, with enough takers like Tata Power, and Adani Power waiting to pick up such assets at the right cost. JSW Energy’s USP is that it is a very efficient allocator of capital. “We not only build projects at very low cost but also execute them on time,” Jain says. For instance, JSW Energy has built power plants at $0.6 million per MW compared to $1.2 million to $ 1.5 million per MW. “Only if you are an efficient capital allocator will you survive in the long run because then you will keep down your leverage,” says Jain, who joined the company in 1995.

However, he calls for a level playing field between the public and private players in the power sector for the industry to thrive. “We should have a competitive bidding process and move away from the existing policy of providing preferential allocation to the public sector,” he says, adding that the time has come to close the old and inefficient power plants and replace them with newer and more efficient ones. Lastly, having healthy state discoms is paramount for all power companies. And one of the ways that it can be done is by directly transferring the money into the accounts of consumers rather than subsidising power, he says.