Initiating Coverage: SJVN Ltd.

Satluj Jal Vidyut Nigam Limited, often known as SJVN Limited, is primarily involved in the generation and sale of electricity.

The company is a Mini Ratna, a collaboration between the Government of India (GOI) and the Government of Himachal Pradesh (GOHP). The Government of India owns 59.92 percent of SJVN, while the Government of Himachal Pradesh owns 26.85 percent. The corporation is critical to accomplishing the central government's goal of optimally utilising the northern region's hydroelectric potential as well as cross-border hydropower development. Furthermore, it is administered by the Ministry of Power, whose nominee sits on the SJVN board.

The Mini Ratna status grants it greater operational autonomy and discretion to establish projects worth up to Rs 500 crore without the express permission of the government. Furthermore, the GoI's majority ownership allows access to need-based or viability gap funding. Beginning with a single project and a single state operation (the 1500 MW Nathpa Jhakri Hydro Power Station in Himachal Pradesh), the company has completed seven projects totaling 16.51 MW of installed capacity and an 86 km 400 KV Transmission Line.

The Himachal Pradesh government agreed to provide concessions such as deferment of free power, reimbursement of 50 percent of state GST, and booking of 1.5 percent LADF to any head other than project cost, BOOT/ BOOM for 70 years, among other things, with the goal of lowering hydro tariff to around Rs 4.5 per unit. With increased demand, there is considerable scope for sustained expansion of business in the hydro, renewable, and thermal energy sectors in the next years.

It is developing electricity projects in India's Himachal Pradesh, Uttarakhand, Bihar, Gujarat, Rajasthan, and Arunachal Pradesh, as well as neighbouring Nepal and Bhutan. In terms of hydro potential, India has an estimated potential of over 1,50,000 MW, of which only approximately 45699 MW (as of 31.03.2020) have been commissioned. The majority of the untapped potential is concentrated in the hill states of Himachal Pradesh, Uttarakhand, Arunachal Pradesh, Jammu and Kashmir, and Sikkim.

SJVN has achieved the greatest ever total generation of 9678 Million Units during FY20 against the MoU Target of 9100 Million Units, breaking its own previous record of 9346 Million Units. Despite the pandemic, the company's financial situation and performance have been outstanding. SJVN, on the other hand, may face an indirect influence from the global economic slowdown caused by the COVID19 pandemic.

Various government measures, as well as the most recent union budgetary decisions, strongly support the power sector. In the current state of affairs, state-owned or debt-ridden DISCOMs are a long-term source of concern for the electricity sector. However, SJVN was able to improve its receivables, recovering approximately Rs 300cr from J&K in the last two months out of a total of Rs 600cr, with the remainder expected to be collected shortly. Several initiatives have been taken to reform and strengthen the electricity industry, including power generation, transmission, and distribution, which bodes well for the organisation. The cost-plus tariff system will assist SJVN in generating healthy generation in plants. During fiscal year 2020, the organisation became the country's first PSU to reach Level-3 People Capability Maturity Model (PCMM) Integration.

A Hydropower Project's Business Model:

The corporation sells power to large groups of consumers, the majority of whom are state-owned utilities and private distribution companies. Electricity is sold through long-term Power Purchase Agreements (PPAs) with such Utilities. Tariffs are calculated using Annual Fixed Charges (AFC), which include Return on Equity (ROE), Depreciation, Interest on Loan, Interest on Working Capital, and Operation and Maintenance Expenses. In order to recoup income tax incidence, ROE is grossed up with reference to the corresponding fiscal year's effective income tax rate.

New Developments

The company had signed many MoUs, settled blocked projects, started building work, and is also exploring various new locations and other projects that will eventually increase generation capacity:

On the business expansion front, the company secured three Hydro Electric Projects in the Chenab river basin in the state of Himachal Pradesh during FY20, namely Bardang HEP (138MW), Purthi HEP (210MW), and Reoli Dugli HEP (430MW), adding 778 MW to the company's project portfolio. It has also entered into a series of Memorandums of Understanding (MOUs) as part of its growth drive to maximise its reach in order to fulfil the vision of New India 2022. (Shared vision of 5000 MW by 2023, 12000 MW by 2030 & 25000 MW by 2040). During FY20, SJVN signed Memorandums of Understanding (MOUs) for eight hydro projects totaling 2388MW while attending road shows such as "Power Conclave" and "Rising Himachal Global Summit" in November 2019. These projects are located in Himachal Pradesh's Satluj, Beas, and Chenab river basins. The development of these projects will result in a Rs 24,000cr investment.

Another Memorandum of Understanding (MOU) was signed in June 2019 with NEEPCO to work and cooperate for the development of power projects in India and abroad, with an immediate focus on the Northeast and Eastern States of India. SJVN and NEEPCO have agreed to collaborate through Joint Ventures (JVs), Special Purpose Vehicles (SPVs), and consortiums. In June 2019, SJVN and BHEL signed another Memorandum of Understanding for the development of solar power projects in India. This Memorandum of Understanding intends to strengthen the parties' strategic relationship in order to pursue commercial solar power projects together through participation in a tariff/viability gap funding based competitive bidding procedure.

Among other significant milestones during FY20 was the financial closing of the 900 MW Arun-3 HEP in February 2020. The groundbreaking ceremony for the 210 MW Luhri Stage – I HEP (20% equity) and the 66 MW Dhaulasidh HEP was held. Furthermore, the Government of India has designated SJVN as the Nodal PSU for the implementation of a 1000 MW solar energy development in Himachal Pradesh. This will increase the company's installed capacity, and SJVN will contribute to Gol's renewable energy capacity addition targets.

In another significant move, the Himachal Pradesh Government approved the R&R plan for the Dhaulasidh HEP on July 29, 2020, and the MoEF& CC granted Stage – 2 Forest clearance on August 11, 2020. SJVN's Joint Venture - Kholongchhu Hydro Electric Limited (600 MW) signed a Concession Agreement (CA) with the Royal Government of Bhutan, marking a significant milestone. With the signing of this agreement, the problem of power sale, which had been outstanding since 2016, has been settled, and both governments (India and Bhutan) have given their approval. This project has been put out to bid, and the company is in the process of awarding the contract. Kholongchhu HEP (Rs 5000cr, of which Rs 190cr has already been spent; 30:70 D/E with 5 years of commissioning) is Bhutan's first Joint Venture Hydro Project and represents thriving Indo-Bhutan Economic Cooperation. The project in Bhutan is a joint venture with a 50:50 cooperation between SJVN and DGPC (Druk Green Power Corporation).

Furthermore, the corporation is making efforts to bring numerous projects that are in the construction stages to a financially feasible state. These include the 252 MW Devsari HEP and the 44 MW Jakhol Sankri HEP. The company is also in discussions with various state governments (Uttarakhand and Maharashtra) to expedite the development of the 880 MW Kaza Solar Park in Spiti Valley, as well as the allocation of a 1,000 MW floating solar power project on the Ujani dam in Uttarakhand and Maharashtra, respectively. Similarly, the Nepalese government has awarded (MoU pending) one more project to SJVN, the Lower Arun Project, taking into account different characteristics such as free power, construction period, and other things that the Nepalese government has taken into consideration. This project will benefit SJVN because it is a downstream project. The downstream project is the Arun III (679 MW; 30 percent equity; April/May/June 2023-Feb 2025 start) with a total cost consideration of Rs 7000cr. So far, Rs 1400cr has been spent. The competition for the project was between two more companies, one with a JV with a Chinese company and another with a Japanese company. SJVN anticipates starting the project within the next 2-3 years (normal hydro projects start within 5-7 years). The Arun III project is a run-of-the-river scheme with a peaking time of 4 hours that will generate 3924 MU of electricity each year.

In addition to Nepal, the company is interested in Arunachal Pradesh and Sikkim, as Arunachal Pradesh has a potential generation capacity of 50,000 MW and Mizoram has a capacity of 4,500 MW. As a result, the North East will be a high priority location in the company's Hydro Power expansion initiatives. To address this, the business is in contact with the state governments of Arunachal Pradesh and Sikkim to discuss potential investment options. The Government of India recently granted environmental permission for the 382 megawatt Sunni Dam project in Himachal Pradesh. Furthermore, the Supreme Court has approved a new scaling stage II for the 66 MW Dhaulasidh project in Himachal Pradesh.

According to the Hydroelectricity Policy, hydro and solar expansion is in the works. The Government of India has approved two projects in Himachal Pradesh: the Lohri project, worth Rs 1810 crore, and the Balasindh project, at Rs 687 crore.

The company anticipates revenue of roughly Rs 3000cr in FY22 (200 MW capacity expansion in the solar side). Revenue in FY23E will rise as fewer projects come online. Other projects on the list include the Rs 10,000cr BUXAR project (1320 MW; Rs 1350cr spent; 30% equity; Jan 2024 start), and the Naitwar Mori projects (60 MW; Rs 650cr spent with Rs 400cr as equity and Rs 100cr as bank loan; Sept 2022 start). The project is conceived as a run-of-the-river project with the capability to generate 265.5 MU of electricity in a year with a 90 percent reliability. During FY20, SJVN also completed the 50 MW Sadla Wind Power Project in Gujarat.

The Union Budget 2021-22 announcements for the power industry focused on a variety of topics that, if implemented correctly, will boost the sector as a whole:

The Union Budget 2021-22 is primarily concerned with infrastructure, with a special emphasis on the power industry. The National Bank for Financing Infrastructure and Development is being established by the government as a new Development Financial Institution (DFI) (NaBFID). An initial capital base of Rs 20,000cr is a commendable move, as 15-20% of the amount will be allocated to the power sector and would be utilised to finance around 10 GW. Another benefit is the relaxation of rules for international investors to allow them to invest in InvITs. The private sector and public sector entities ramping up renewable capacity are likely to use InvITs to unlock their equity.

Furthermore, the budget has declared strategic disinvestment of public sector enterprises with the goal of reducing the presence of CPSEs in order to generate additional space for private sector investment, as well as categorising various sectors as strategic and non-strategic. The power sector has been designated as a strategic sector, and it is proposed that it will have a bare minimum of CPSE presence, with the remaining CPSEs either privatized/merged with other CPSEs or closed. This appears to be a positive move toward reform in a sector dominated by public sector firms. Moving forward, it is suggested to establish an asset reconstruction firm, basically a "bad bank," to take over stressed debt from public sector banks and subsequently manage and dispose of the assets to Alternative Investment Funds.

(AIFs) as well as other possible investors. This will go a long way toward controlling the non-performing status of numerous power sector loans, as well as potentially revitalising several delayed projects.

Furthermore, DISCOM reform has been designated as a major priority issue for the current government and has received considerable attention. The government declared the necessity for choice of provider in power distribution in order to put pressure on incumbent DISCOMS to improve. If properly implemented, this might be a first (and significant) step toward bringing competitiveness and compelling DISCOMs to focus more on the demands of the ultimate user. In this regard, it has been proposed that a revamped reforms-based result-linked power distribution sector scheme be launched with an outlay of Rs 3,05,984cr over a five-year period to provide assistance to DISCOMS for infrastructure creation, including pre-paid smart metering and feeder separation, as well as system upgradation that is linked with financial improvements. This is a positive start toward reducing the rising aggregate technical and economic losses (AT&C Losses). This will mostly benefit the producing firms' receivables. By attaching funding to improvements, funds may be made available solely on the basis of successful outcomes, in accordance with the current model.

A phased production strategy for solar cells and panels is scheduled to be announced for the renewable segment. Additionally, customs tax on solar inverters and solar lights has been hiked in order to stimulate domestic manufacturing. Along with this, efforts such as promoting green hydrogen and increasing funding for SECI (Solar Energy Corporation of India Limited) and IREDA (Indian Renewable Energy Development Agency Limited) for renewable energy would aid in the transition to a cleaner energy future. The budget has allocated Rs 757 crore for Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India (FAME), Rs 776 crore for PM-KUSUM, Rs 5300 crore for Integrated Power Development Scheme (IPDS), Rs 1455 crore for power system strengthening, and Rs 574 crore for Power System Development Fund (PSDF).

Although the budget did not address various structural issues and bottlenecks in the renewable sector, the announcement of the 'Hydrogen Energy Mission' (generating hydrogen from green sources) and additional capital infusion into Solar Energy Corporation of India (Rs 1000cr) and Indian Renewable Energy Development Agency (Rs 1500cr) are a few welcome measures.

Furthermore, the waiver available for usage of Inter State Transmission System (ISTS) transmission costs and losses has been extended for use of Inter State Transmission System (ISTS) for transmission of energy by solar or wind power projects commissioned through December 2022.

The waiver will be valid for twenty-five years from the date of commissioning of such projects.

Improving financials: Since implementing the Atmanirbhar package, the firm has reduced its receivables from Rs 822cr in Q2FY21 to Rs 522cr in Q3FY21. The amount of Rs 119 crore will be higher than 45 days (without interest). In terms of CAPEX (Rs 23000cr from 2022 to 2024), the firm has a cash position of Rs 2000cr, earnings (Rs 1200-1300cr) would be used, and a further sum of Rs 1500cr would be added when some projects come into operation, increasing profits. SJVN has used a 20:80 equity:debt ratio in several projects (70:30 renewable; 80:20 hydro projects; 60.5 percent ROE), where 20 is equity and 80 is debt. Thus, in a nutshell, CAPEX will be covered by the issue of bonds, stock, loans, and so on, which will not put pressure on the dividend payment portion, allowing it to stay up with the payout.

The management has indicated for a dividend per share of close to Rs 2.2 for FY21, which would be maintained for the following 2-3 years.

Long-term Causing Factors

SJVN follows the Cost-Plus Return on Equity strategy, which allows the firm to recoup the majority of its costs:

The hydro power plants typically operate on a cost plus return on equity model, in which the regulatory authorities reimburse the corporation for capital expenditures/interest expenses/depreciation charges (where applicable). SJVN works on a cost plus return on equity basis in this case. The CERC (Central Electricity Regulatory Commission) is the regulatory agency in charge of determining tariff rates. This ensures a sufficient cost recovery. The business anticipates that ROE for storage type hydro projects will remain at 16.5 percent (norms tightened, receivable days will be 45 days instead of 60 days, and escalation will be 4.77 percent rather than 6.64 percent).

SJVN's two cash cows are the Nathpa Jhakri Hydro Power Station (NJHPS) and the Rampur Hydro Power Station (RHPS).

During the month of July 2020, NJHPS and RHPS recorded their greatest ever monthly generation of 1213 MU and 334 MU, respectively, compared to prior highs of 1191 MU and 327 MU.

Various more government initiatives can help the firm even more:

The government has maintained its focus on its flagship power sector through reform schemes such as the Pradhan Mantri Sahaj Bijli Har Ghar Yojana (SAUBHAGYA), Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY), Integrated Power Development Scheme (IPDS), Smart Metering, Ujwal DISCOM Assurance Yojana (UDAY), One Nation-One Grid-One Frequency, and others. During the year, the Union Cabinet approved guidelines for implementing various measures to promote the hydropower sector, such as declaring large hydropower projects (>25 MW) as renewable energy; Hydropower Purchase Obligation (HPO); Tariff rationalisation measures; Budgetary support for flood moderation component; Budgetary support for enabling infrastructure such as bridges and roads, among others. In 2019, eight Regional Energy Management Centers (REMS) were established. These REMCs would aid in the grid integration of renewable energy by addressing the intermittent nature of RE generation and permitting real-time forecasting, scheduling, and tracking of RE generation.

What may go wrong in the short term- There are various issuances and outstanding orders that must be cleared in large power projects. Significant time or cost overruns in under-construction projects reduce the cost competitiveness of these projects or their ability to earn regulated returns, which may result in CERC disallowances or higher dividend payouts/development of new projects, resulting in a reduction in the cushion available for debt servicing.

Strenuous capital expenditures, largely to be paid for with equity, may create a strain on the system during low-generation periods.

Utilities' payment patterns in India have traditionally been poor. When it comes to receivables, the generating firms are on the receiving end. Despite the provision of a liquidity package worth Rs 1.2 lakh crore, which assisted in lowering systemic stress on DISCOMs, the financial viability of DISCOMs remains a severe worry, as noted in the budget address. Receivables grew by 172.5 percent during FY20 to Rs 744.5cr from Rs 276.6cr. The firm would face a Rs 197cr impact in its FY21 balance sheet as a result of a DISCOM discount (Rs 450cr total discount offered, of which Rs 253cr will be passed on to the DISCOM).

Over the years, the hydropower industry has faced a slew of legislative and administrative roadblocks that have resulted in project delays and increasing costs, finally rendering hydropower projects commercially unviable.

The exemption for all pieces of machinery, instruments, appliances, components, or auxiliary equipment used in the establishment of solar power production projects has been revoked. This will have a minor influence on the capital expenditures associated with solar power producing installations. Developers would now be burdened by increasing import prices, which would also result in litigation under power purchase agreements for change in legislation claims (adding to the burgeoning list including safeguard duty, GST et al).

However, NaBFID will confront a number of problems, including the persistent lack of maturity in the corporate debt market and the difficulty of securing a sustainable source of long-term capital.

Hydro projects are dependent on water availability and consequently on a favourable monsoon. In general, the third quarter stays lacklustre.

The Bhutanese government is cautious about bringing in additional Indian workers. The more COVID cases that are filed, the longer the awarding process will take.

About the firm SJVN Limited, together with its subsidiaries, generates and sells power in India, Nepal, and Bhutan. It runs the 1500 MW Nathpa Jhakri Hydro Power Station in Shimla District, Himachal Pradesh, India, and the 412 MW Rampur Hydro Power Station in Kullu District, Himachal Pradesh, India. The company also operates the Khirvire Wind Power Plant in Nashik District, Maharashtra, with a capacity of 47.6 MW; the Charnakha Solar Power Plant in Patan District, Gujarat, with a capacity of 5 MW; and an 86-kilometer cross-border transmission line with a capacity of 400 kV from Muzaffarpur to Sursand.

Furthermore, it offers consulting services in the fields of hydropower, road/railway tunnels, and so on, as well as hydroelectric project development from idea to commissioning to a variety of enterprises. In September 2009, the corporation changed its name from Satluj Jal Vidyut Nigam Limited to SJVN Limited.

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