High FCF increases importance of dividend policy and growth initiatives
JSW Energy’s (JSWEL) Q1FY21 consolidated revenue declined 25.2% YoY to Rs18bn, while EBITDA stood at Rs7.5bn, down 7.9% YoY, and PAT stood at Rs2.1bn, down 22.3% YoY. On generation front, Barmer and hydro units performed well; however, thermal generation was lower due to dip in merchant sales and group captive offtake but offtake from long-term customers (ex-group captive) improved. Fuel cost remained low due to subdued international coal prices and lower volumes. JSWEL reduced its net debt by Rs4.5bn QoQ, which further aided the decline in its interest cost (down 3.1% QoQ). JSWEL and GMR have mutually agreed to terminate GMR Kamalanga (GKEL) acquisition, but Ind-Barath Utkal acquisition remains under process awaiting NCLT approval. The company maintains its 10GW target in medium term, where incremental addition will majorly come from renewables. Given the low capex outlook in near term, management indicated that cash will be utilised for debt repayments and/or higher dividends. However, we await more clarity on dividend policy as well as inorganic growth initiatives in the near-term. Maintain BUY with a target price of Rs60.
* Generation declines due to lower offtake from group captive: Generation declined 16% YoY to 4,930MUs. Lower ST sales and back down from group captive affected sales at Vijaynagar (down 39% YoY) and Ratnagiri (down 29% YoY), but Barmer sales (up 8% YoY) improved due to higher offtake from discoms (thermal offtake by discoms were up 8% YoY). Hydro generation (down 12.6% YoY) was down due to lower water availability. Earnings were supported by lower fuel cost/unit (down 33% YoY due to lower imported coal prices and generation), lower interest cost (down 11% YoY due to reduction in net debt by Rs4.5bn QoQ to Rs84.9bn) and lower taxes. O&M expenses also reduced YoY due to optimisation, deferment of a part of the expense (CSR etc.) and Rs250mn one-off in Q1FY20. Lower merchant sale on exchanges also reduced expenses. JSWEL aims for 4-6% reduction YoY in O&M expenses for the year. With ~Rs10bn cash, company’s other income increased further by Rs310mn one-off due to reversal of liabilities.
* GKEL acquisition terminated: With the elapsing of long stop date, both the parties, i.e., JSWEL and GMR have mutually agreed to terminate the acquisition. Ind-Barath Utkal (700MW), at least for now, remains under process, pending approval from NCLT (no hearing during lockdown period), and expects to complete by H1CY21.
* Medium-term capacity target of 10GW intact:
JSWEL has maintained its 10GW capacity target in the medium term with incremental addition coming mainly from renewables. It will also participate in SECI’s upcoming 5GW hybrid tender. Underleveraged balance sheet (net D/E at 0.7x) will help fund high RoE growth projects.
* Receivables under control: Receivables are lower by 20% from Mar’20 levels, as of Jul’20-end (lowest in the past six quarters) while overdue is down 33% compared to Mar’20. JSWEL expects it to decline further with the receipt of Rs900bn PFC/REC loans by states. The company received Rs3.5bn more than the amount billed during Q1FY21.
* Valuation: With high cash generation, in addition to the current high cash reserves(~Rs10bn), and no visible capex apart from maintenance capex, we expect JSWEL to consider higher dividends and/or buy backs, apart from higher debt repayment. Maintain BUY with a target price of Rs60.
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