Friday, May 25, 2012

>SJVN: The defensive bet

 Strong dividend yield, negligible downside: We are turning positive on SJVN, primarily on the pretext of the deteriorating thermal power scenario, volatile market conditions and the company being the highest dividend yield (5-6%) play. The company has a sound operating history and some near-term trigger which will give an impetus to the earnings growth. We expect an EPS and book value CAGR of 7% and 9%, respectively, over FY12E-15E.

 Capacity addition of 27% to the present capacity by FY15E: SJVN’s current operational landmark, the 1500MW Nathpa Jhakri Hydroelectric Project (NJHEP) on the river Sutlej, is running at an average plant availability factor of 99-100% during FY11—12E (which is above the normative benchmark of 82%) and thus, has surpassed MOU targets. The company is now expected to commission the 412MWs’ Rampur project (located downstream to NJHEP) by FY15E and is likely to commence another 50MW wind project during the same period. Post that, an additional capacity of nearly 1.3GWs is expected to come in by FY21E.

 Annuity‐based sales guarantee ROE: NJHEP plant operates under the CERC norms and is entitled to earn ROE of 15.5% on the regulated equity of Rs41bn plus incentives based on the upside from good monsoons which aid ROEs by atleast 4-5%. We expect the total returns to grow to Rs10.5bn in FY15E from Rs8.8bn in FY12E.

 Valuation and Recommendation: SJVN is a relatively steady and safe bet on account of a proven track record in terms of operations, a small but reliable capacity addition and a superior dividend yield of 5-6%. The company trades at 0.8xFY14E which is at par with NHPC’s (Accumulate, TP Rs24) current valuations but below NTPC and Private IPPs. In the absence of any convincing sustainable story in the thermal sector, we turn positive on the hydro sector and thus initiate on SJVN with a ‘BUY’.

 To read report in detail: SJVN