SJVN Ltd - Hydroelectric power

SJVN (Satlaj Jal Vidyut Nigam) Ltd is a PSU in the business of operating hydro electric power plants in HP and neighboring states.

91% of shares are owned by central and HP governments and public float is only 9%.
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Company has 3 operating hydro plants and several plants are under various stages of development.


Source AR 2017.

Output of power generated has steadily gone up as plants are commissioned.

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Source AR 2017.

Company is on track to generate more power in FY 18.

Source: 9M results FY 18.

Revenues and profits reported by the company over the years are volatile mainly because of delay in CERC approvals of tariff structure.
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Source Capitaline

What’s more important is the cash generated from operations. CFO and cash profits are steadily rising.

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Source Capitaline

This is because company is actually receiving cash for the power that it sells and it is not being used to bail out cash strapped distribution companies.

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Source Capitaline

In FY 18, debtor days are lowest in 7 years.

Company has about 1000 Cr debt and 2000 cr cash. Company took debt from World Bank for building the dam. Debt is a low interest rate so company is not paying it down. Instead it is using cash to pay dividends and buyback shares helping the central government lower the fiscal deficit.

Company brought back 20.68 Cr shares at 38 Rs / share. It has hiked dividend payout since 2017. For FY 18, in addition to buyback, Rs 1.90 is paid as dividend and another 0.5 Rs is likely to be paid as final dividend. At current price of 26.75, dividend yield works out to be 8%.

Company generates enough cash to pay for projects under construction and pre-construction and still has enough cash to pay for dividends. Since company is 91% owned by governments, it is likely to pay high dividends.

Valuation

I will value this company at 1 times book value. With the recent fall in stock price, it is now trading at book value. A dividend yield of 8% with stable cashflow trading at book value is a good candidate for low growth dividend play.

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Source Capitaline

Risk Factors

  • FY 17 annual report has several qualifications from auditor regarding misappropriation of funds by management. Amounts are small and qualifications are regarding overcharging by vendors.
  • Debt is denominated in foreign currency so a drop in value of rupee will cause interest payment to go up.
  • There is always possibility of governments asking for free power or delaying payments.
  • There are persistent delays in various approvals for under construction projects.
  • Dividend can be cut if company has to pay for new projects.
  • New projects take long time to break even and company can get stuck with partially built non-revenue generating projects.

Disc: Invested

16 Likes

Few points to consider

  1. In 2017 total dividend is Rs 2.4 and in 2018 dividend is Rs 2.1 So dividend has not maintained. Will it be situation like Coal India where earlier dividend was around 29 Rs and now came down to 16 Rs.
  2. Quarterly profit (QoQ as well as YoY) is showing downtrend.
  3. Also yearly profit is going down. (compared for last 4 years. Mar ’ 15 EPS is 4.05 and Mar ’ 18 EPS is 3.12)
  4. ROCE and Net Profit Margin are also decreasing
  5. Current PE is above historic average so chances of PE upward re-rating are less

Based on dividend yield SJVN looks good but at current price and overvalued index levels it looks it will go in Time Correction.

Disc: Not Invested as of now but interested

In FY 18, company bought back 20.68 cr ar 38 rs/share. This should be added to total dividend payout to calculate total payout. Here is a history of total payout for last 13 years

Rs Cr.

Year End Dividend + Buyback
200503 143
200603 159
200703 235
200803 244
200903 320
201003 328
201103 331
201203 389
201303 397
201403 405
201503 434
201603 455
201703 1,138
201803 1,650

FY 18 numbers do not include expected final dividend.

A buyback is just a substitute for dividend. In fact SJVN has done both buybacks and dividends in FY 18.

10 Likes

Hi,

I have briefly studied SJVN and NHPC and decided to invest in NHPC.

The problem with Hydro projects is that post initial investment of few thousand crores the project can be struck for environmental approvals, Rehabilitation issues, etc. This is pretty common. NHPC has a project under construction that is stuck for such reasons for few years and 9000 cr has already been invested in the same, Imagine such a large fund invested and project stuck.

I know of a pvt hydro developer (part of S Kumar’s group). They were developing a hydro project in MP and it took close to 20 years to develop the same for similar R&R issues.

So under construction projects carry a significant risk in Hydro projects… In my view, these cannot be assigned any value. Rather, I would assign a negative value owing to incidences like above.

Second, SJVN is developing a large thermal power project. With cost of renewable including solar, wind, hydro being lower than thermal now, it does not makes sense to invest in a thermal project. A number of thermal projects are already under stress either due to lack of PPA, lack of offtake or lack of coal linkage. This was one of the reasons , I gave SJVN a miss.

3 Likes

Totally agree and have seen so many projects being killed by regulatory issues.

Another risk factor for the stock and not for the company, is that the government has to eventually sell down its stake to 75%. So frequent OFS may dampen the share price. NMDC is an example.

1 Like

Gov is a promoter which has interests much larger than the underlying companies. They have a country to run. Pls think 10 times before investing in gov companies. I have burnt my fingers a lot in PSU banks, even NHPC, PSU oil companies etc. and now have a firewall for Gov companies

4 Likes

No doubt SJVN looks like the best listed gov company and selling at a discount EV/EBITA on a peer comparison and cashflows are exeptional with most of it payed out, concerns on receivables are easing out. A value of a company also takes into account their rate of growth , risk to future cashflows etc… Which does not look very good for them. Their growth is going to come from their Arun 3 project and Khologchhu project which will add a 1500 MW capacity , but even if everything goes well it can take some good many years to complete and get operational. I would say it will look like investing in a high risk high yield bond with some growth in it , if bought at the right price.

Disc: Just a beginner and SJVN forms a miniscule portion of my portfolio since 2015

1 Like

Tariffs are regulated and have been reduced in FY 2018. Hence the drop in profits in current year.

3 Likes

GOVT need to not have to reduce their stake to 75%. As per rule, it is to be brought down to 75% when post-issue capital is < 4000 Cr. But for> 4000 cr, it is maximum 90% for promoter (stated other way, a minimum 10% public holding). So SJVN does not fall under 75% but 90% category. Even otherwise, SJVN IPO came in 2010 and 75% holding must have been acheived in 3 yrs from IPO.

Please correct me if i am wrong.

1 Like

I think the figures you are talking about are during IPO time, please see the linked article. Also all PSUs were given extension to comply by this rule till August 2018 (which looks like will still be extended).

“Companies with a post-issue capital of less than Rs.4,000 crore will have to sell a 25% stake or stocks worth Rs.400 crore, whichever is lower, to the public in an initial share sale, while a company with a post-issue capital of more than Rs.4,000 crore is allowed to offload a minimum of 10% in the IPO. However, if an IPO of Rs.400 crore size is not equivalent to 25% of its post-issue capital, the minimum public shareholding of 25% has to be achieved within three years of listing.”

“Another risk factor for the stock and not for the company, is that the government has to eventually sell down its stake to 75%. So frequent OFS may dampen the share price. NMDC is an example.”

My response was to the above mentioned statement of yours.

Why SJVN has to eventually sell down its stake to 75% ?

Not SJVN, its promoter (GOI) has to pare down its stake to 75% as per the norms for all listed companies by SEBI. Of course they have extended the timeline for this but it has to occur. So we should expect more OFS which generally if not managed well leads to prices falling.

I searched for this rule 19A of SECURITIES CONTRACTS
(REGULATION) RULES, 1957 which states that Minimum Public Shareholding (MPS) is not applicable for PSUs and i have copied the same below :

1399433501593.pdf (118.7 KB)

_(1) Every listed company [other than public sector company] shall maintain public _
_shareholding of at least twenty five per cent. [Provided that any listed company which has _
public shareholding below twenty five percent, on the commencement of the Securities Co
_ntracts (Regulation) (Amendment) Rules, 2010, shall increase its public shareholding to _
at least twenty five per cent, within a period of three years from the date of such
_ commencement, in the manner specified by the Securities and Exchange Board of India. _
_Explanation: For the purposes of this sub-rule, a company whose securities has been _
_listed pursuant to an offer and allotment made to public in terms of sub-clause (ii) of _
_clause (b) of sub-rule (2) of rule 19, shall maintain minimum twenty five per cent, public _
_shareholding from the date on which the public shareholding in the company reaches the _
level of twenty five percent in terms of said sub-clause.]

So i can conclude that govt stake sale in PSUs is only to meet fiscal deficit/disinvestment and not due to SEBI rules.

Looks like initially PSU were exempted and later on bought into the ambit of this rule. From the linked article -

Market regulator Securities and Exchange Board of India (SEBI) had mandated a minimum 25 per cent public float for all listed companies. This was extended to state-owned firms, who were initially given three years to meet the norm.

Thanks for the clarification.

Then there is always a short to medium term risk in the form of OFS for high govt stake PSUs though valuation is compelling in few of them.

Quarterly results for the last 2 quarters are not encouraging

  • Mar-18 QTR EPS is 0.34 against Mar-17 EPS as 0.68
  • Jun-18 QTR EPS is 0.75 against Jun-17 EPS as 1.09

There is decline in Revenue. Price / Earnings ration is more than last 5 year average PE ratio. I am waiting for the next 2 quarters result to check the trend and price movement.

Disc: Though interested still tracking mode.

1 Like

Apparently the government plans to merge SJVN, PFC (and perhaps NHPC too) with NTPC.

1 Like

Would the merger of SJVN with NTPC lead to a dilution in focus for SJVN as it is primarily a hydro power company?
Would this be a negative for SJVN shareholders?

Disclosure - small tracking position in SJVN

Dec’18 quarter has shown some improvement in Sales numbers. Also SJVN has declared dividend of Rs 1.5
Though it is lower than last year the dividend yield is coming out as 5.8% which looks good.

Disc: Though interested still tracking mode.