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Capex cycle commences

We interacted with the management of JSW Energy’s (JSWEL) to gain more clarity on its medium-term growth path and targets. In its quest towards becoming a 10GW capacity company by FY25 driven by renewables (and 20GW by FY30), JSWEL has a clear vision on commissioning of 2.5GW (currently under construction) by FY23 and its participation in auctions to secure the balance 3GW. Company has clarity in terms of project selection – land availability, P90 CUF levels, mid-teen IRRs and high quality offtakers – and it will continue to prefer wind and hybrid projects over solar in the near term. It is also locking-in and developing resources with high lead times – land, evacuation infrastructure, manpower, etc. – which will place it in an advantageous position in future bids and boost project returns as well. Over the past 4-5 years, JSWEL has changed its strategy a couple of times, which can be partly attributed to sectoral shifts. It has proved itself credibly in terms of project execution and operational capabilities, but we await more clarity and pace pickup in the RE auction space for incorporating capacities beyond 7GW. We incorporate these developments in our SoTP valuation and increase our target price for the stock to Rs130 (earlier: Rs83) giving value to renewables platform growth as well. However, as valuations have run up before earnings visibility, we downgrade the stock from Reduce to SELL.

Capacity commissioning targets till FY24 look promising and achievable:

JSWEL is setting up 2.5GW of RE + hydro capacity at a cumulative capex of Rs158bn (of which Rs5.5bn has already been spent till May’21), to be commissioned over the next 2-3 years. This includes: a) 810MW SECI-IX wind-solar hybrid project, b) 450MW SECI-X wind project, c) 958MW group captive renewables project with JSW Steel, and d) 240MW Kutehr HEP (SCoD in FY25). The RE projects will be commissioned in parts over FY22-FY23 (we expect FY24 to be the first full year of operations for RE). The blended tariff for the projects is Rs3.31/kWh and the IRRs for each RE project is >12% (at P90 levels). JSWEL has already acquired land for these projects and related infrastructure (evacuation, water, etc.). As per the company, its internal accruals are sufficient for the equity requirement, as it generates FCFE of Rs17bn p.a. We expect an addition of Rs18bn to the consolidated EBITDA from FY24 onwards.

Readying itself for growth beyond ongoing projects:

For growth beyond FY23 in order to reach 10GW by FY25 and 20GW by FY30, JSWEL informed that it is locking-in resources in resource-rich states and will be developing facilities in advance. Company has locked-in land at various locations, sufficient for further 3GW of RE capacity expansion. It is in the process of locking more land for development of a further 15GW. It will be developing basic infrastructure including water, roads, power evacuation, etc. in advance so that it has ready assets for deployment and will be in an advantageous position when participating in future bids. Management stated that in case of future projects also, it will continue to be selective and participate in auctions where competitive intensity is lower (e.g. wind and hybrid currently), so that it has a chance of earning higher IRRs. It will only consider P90 CUF levels with high quality offtakers to mitigate payment risks. Company will be more comfortable participating in solar bids once the tariff war settles down and volatility in panel prices reduces.

Preference of wind/hybrid over solar to continue till solar tariffs stabilise:

JSWEL currently has a clear preference for wind and hybrid projects over solar when it comes to bidding, due to several factors: 1) lower competitive intensity as execution of wind projects is more complex, 2) higher tariffs, 3) lower equipment cost volatility (compared to high volatility of solar module prices), 4) frequent changes in solar-related policies vs higher stability and certainty in wind-related policies. As resources, both wind and solar are cyclical in nature, and the only way to reduce operational risk is to consider P90 CUF levels.

Posted decent results in Q4 and FY21 despite challenging environment:

Q4FY21 consolidated revenue / PAT were Rs15.7bn / Rs1.1bn, or 12.5% / 1.7% YoY lower respectively, while EBITDA was up 10.8% YoY to Rs6.3bn. Long-term (LT) generation increased 3% YoY, boosted by 13% increase in generation at Barmer and 15% increase at Vijayanagar. Revenues were impacted since a few existing LT customers (at Ratnagiri) migrated to job work / tolling arrangements (no EBITDA impact). Earnings were hit due to: 1) lower merchant volumes (mainly Ratnagiri) and prices, partially offset by lower fuel cost; 2) lower other income; and 3) lower interest cost. JSWEL’s net debt further reduced by Rs5.1bn QoQ to Rs62.1bn, and net D/E to 0.4x, with weighted average cost of debt at 8.2%. Receivables declined 38% YoY to 3-year low of Rs13.1bn. For FY21, consolidated revenue/EBITDA was Rs69.2bn / Rs29.1bn, or 16.3% / 1.7%, lower YoY respectively, while recurring PAT was up 3.3% YoY to Rs8bn. Long-term (LT) generation increased 3% YoY.

Outlook and valuation:

Although execution capability of JSWEL is superior and its O&M cost per MW is lower than peers, we believe the stock price incorporates the upside from the 2.3GW RE addition, which we have valued at 9x EV/EBITDA giving the business a platform value on FY24E basis. We have also incorporated extra income from Karcham Wangtoo as its rated capacity was increased to 1,091MW. We await more clarity on pickup in bidding in the RE space as it has slowed down considerably in the past year. We will therefore incorporate the further 13GW targeted capacity (over and above 7GW by FY24) as and when the bidding commences and on JSWEL’s performance in those bids.

Out of the company’s net worth of Rs145bn, cash and investments (including investments in JSW Steel and JPVL shares) stand at Rs45bn, which implies that Rs100bn is the current invested equity. On this, we estimate Rs14bn PAT in FY24E translating into 14% RoIC. Also, JSWEL’s RoE will increase as more capacities get commissioned since it does not intend to monetise / dilute equity or investments and will do capex from internal accruals only. Incorporating these developments, we increase our target price for the stock to Rs130/sh (earlier: Rs83/sh). However, since the valuations have run up before commissioning of future capacities and resultant earnings, we downgrade the stock from Reduce to SELL.

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