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Profits benefit from back-down charges

Scaling up in Renewables, but valuations well capture upcoming plans

* JSW Energy (JSWE)’s results reflect the benefit of back-down charges for an erstwhile power purchase agreement (PPA) with Telangana. At the consolidated level, EBITDA was up 10% YoY to INR6.3b.

* The co. has set its sights on improving its Renewables footprint, with plans to reach a total of 10GW of installed capacity by FY25 (v/s 4.5GW currently). Wins of 2.2GW (including those for group captives) provide visibility to these plans. However, even as we build in the successful commissioning of these projects over the next 2–3 years, the current price factors this in well. Furthermore, risks to timely execution persist given the lack of PPAs for these projects. We raise our SOTP-based target price to INR130/sh (earlier: INR85/sh) capturing a) the benefit from 2.2GW of upcoming renewable projects and b) the increase in the value of JSWE’s stake in JSW Steel. However, with the sharp run-up in the stock over the past three months, the possible benefits are captured more than adequately. Accordingly, we downgrade the stock to Sell.

Operating profit benefits from income related to back-down charges

* JSWE's 4QFY21 EBITDA was up 10% YoY to INR6.3b (v/s our estimate of INR5.3b). The higher-than-expected number was attributable to INR1b income related to back-down charges for an erstwhile Telangana PPA. Short-term sales volumes were down 55% YoY to 330MUs. Interest costs increased 34% QoQ / 4% YoY to INR2.6b (est. INR2.0b) on account of some provisioning for liabilities related to its hydro plant. PAT was down 2% YoY to INR1.1b (our est.: INR1.0b).

* Hydro generation was down 11% YoY, with EBITDA for the segment down 27% YoY to INR0.7b. EBITDA at Barmer was flat YoY at INR2.4b.

* Net debt (including acceptances and short-term advances) reduced to INR65.5b (v/s INR98.1b at end-FY20). Receivables declined significantly to INR13b (v/s INR21b at end-FY20).

* FY21 adjusted PAT was down 5% YoY on the back of lower merchant volumes, offset by lower interest costs on debt reduction.

Management commentary highlights

* JSWE plans to reach 10GW by FY25, led by 0.8GW of SECI IX, 0.45GW of SECI X, and 0.96GW of group-captive projects. It targets another 3GW of projects from upcoming auctions. The co. further plans to reach 20GW by FY30 by adding 2GW of renewables p.a. over FY25–30.

* The co. plans to incur capital expenditure of INR15.8b for its 2.5GW of under-construction projects. Of these, it expects 200MW to be commissioned by FY22, with another 1–1.2GW by FY23.

* Currently, PPAs are signed only for 540MW of projects. The co. expects PPAs for the balance renewables portion to be signed in 2QFY22.

Current price well factors in upcoming renewables; Downgrade to Sell

* The co. has plans to build a presence in the Renewables space and targets reaching 10GW of overall capacity by FY25 (v/s 4.5GW currently). With 1) a healthy balance sheet position (net debt to equity: 0.5x) and 2) JSWE’s current capacity generating strong cash flows (~87% of JSWE’s 4.5GW is under longterm PPAs), the company does have room to grow. However, risks to the execution timeline persist given the lack of PPAs for some of these projects. Moreover, even as we build in the successful commissioning of 2.2GW of renewable projects over the next 2–3 years, the current price factors this in well.

* We roll forward and raise our SOTP-based target price to INR130/sh (earlier: INR85/sh), capturing a) the benefit of 2.2GW of upcoming renewable projects and b) the increase in the value of JSWE’s stake in JSW Steel. However, with the sharp run-up in the stock over the past three months, the possible valueaccretion is captured more than adequately. Accordingly, we downgrade the stock to Sell.

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