JSW Energy may hit the streets next month; Watch out for JSW Southwest

JSW group which is very much known for the third largest steel maker is expected to open the Initial public offering of its energy division next month. The energy arm of the group is valued at around 23,000 crore. JSW Energy is looking at selling around 10% to mop up a minimum of 2600 crore. The company is issuing around 63.22 million equity shares and the IPO proceeds are to be used for the repayment of debt and equity financing of various power projects.

Per the DRHP filed by the company, the consolidated net profit of the company declined by around 15% to 276 crore in FY 09 as against 324 crore in the previous fiscal. However, the total income had rose by around 40% to 1852 crore.

JSW Energy's capacity is expected to raise to 3140 MW next year and to about 11,350 MW in the next 5 years from the current 1000 MW. It has operational power plants and a constant increase in capacity is expected over the next 5 years. JSW Energy has plans to use 2100 crore from the IPO proceeds to add around 2800 MW of capacity and to build a 170 km transmission line and to develop a lignite mine in the norther state of Rajasthan.

As JSW Energy warms up for its maiden innings, it should be noted that all the three power comanies - NHPC, Adani Power and Indiabulls Power, which came out with their respective public offering and collected around 11,000 crore are still trading below their issue price.

Now, wats up with Jindal South West Holdings? Jindal South West holdings, is a holding company created by Sajjan Jindal, which predominantly has positions in JSW group companies. They already have around 10% stake in JSW Steel and around .5% in Jindal Saw among others. The stock has already been a 10 bagger from their Yearly lows and the stock in the recent months has been buzzing due to the listing of the Energy arm.

Though Jindal South West holdings has directly access to only 100 shares in JSW Energy, it has an indirect stake in the company through Sun Investments Ltd. Prior to the IPO, Sun Investments owns around 21.05% stake in the company and Jindal South West holdings has around 43.37% in Sun Investments as of Dec,2007. So, indirectly, after listing, Jindal South West holdings would have around 8% stake in JSW Energy.

Per the company's plan, it is looking at collecting a minimum of 2600 crore by selling 10.94% in though the public issue. So, with this minimum expectation, the 8% stake of Jindal South West would be valued at around 1900 crore. However, the entire market cap of the Jindal South West is only 2000 crore currently. This looks very cheap when you consider that their 10% in JSW steel is valued at 1700 crore and their 8% stake in JSW Energy would be valued at 1900 crore, at the minimum level.

Though Jindal South West has been a 10 bagger already and the actual gravy has already come out, it is highly likely that there can be significant upside from the current levels. However, do remember that Holdings companies usually trade at a very subdued market cap when compared to its actual value.

Arun Gopalan $ Lead - HBJ Capital,
Arun@hbjcapital.com