Published on 9/09/2019 12:22:52 PM | Source: ICICI Securities Ltd

Option Strategy JSW Energy Ltd by ICICI Securities

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Lower coal prices aids profitability

JSW Energy’s (JSWEL) Q1FY20 consolidated revenue increased 2.2% YoY to Rs24bn, while EBITDA was up 4.3% YoY at Rs8.1bn and PAT improved 6.6% YoY to Rs2.45bn. However, adjusting for the true-up of FY14-19 operational savings, adjusted PAT grew 19.8% YoY. Factors working in the favour of the company during the quarter are: 1) Lower international coal prices, 2) stable merchant prices (standalone realisations remained flat YoY at Rs4.37/kWh), and 3) higher hydropower generation which offsets lower thermal generation. We maintain our BUY rating on JSWEL with a target price of Rs81/sh as we believe the company is well placed to bid for stressed assets as its net debt/equity remains comfortable at 0.86x.

* Thermal generation decline balanced by increase in hydro generation: Higher generation at hydro stations (+29.5% YoY to 1868MUs) boosted consolidated numbers, although net consolidated generation was at 5867MUs, down 3.6%. Generation at Ratnagiri and Vijayanagar declined 12.6% YoY mainly due to lower PLF at Vijayanagar.

* Hydro profitability to be lower in FY20 on truing-up exercise: Despite hydro generation being higher, the adjusted EBITDA for Q1FY20 grew only by 4.5% YoY. This was mainly due to truing-up of 2014-19 MYT during which it had operational savings (mainly O&M and refinancing) of which Rs1.25bn had to be shared with beneficiaries and will be done in FY20. Rs430m has been booked for the quarter.

* Improving capacity tie-ups to provide stable profits: JSWE has tied up 81.4% of its capacity under long-term PPA. From its Vijayanagar plant, it has secured 300MW PPA from Telangana discom for nine months commencing in July’19 at Rs4.41/unit (net for the company) and is also L1 with 290MW at Rs4.41/unit in the recent 3-year bids called by PFC/NHPC (which has made some progress according to the company). It plans to tie-up the entire open capacity from this plant under long term with its group companies in the next 2-3 years. Of the 36MW in Nandyal under Group Captive, 18MW has been commissioned and the balance is expected by Q3FY20.

* Maintain BUY; Sustainable EBITDA growth and deleveraging will lead to 28% CAGR in profits over FY19-21: With a strong operating cashflow of ~20bn annually, even without factoring-in any acquisition yet, we expect EBITDA/PAT to grow at a CAGR of 7.8%/28% over FY19-21E. We believe the company is best placed in the upcoming auctions of stressed assets as it can potentially acquire up to 3-4GW. Maintain BUY rating with a SoTP-based target price of Rs81/sh. 


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