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RE focus continues

JSW Energy’s (JSWEL) Q1FY22 consolidated revenue/EBITDA/reported PAT came in at Rs17.2bn/Rs7bn/Rs2bn, lower by 4.3%/6.3%/5.7% YoY (adjusted PAT up 23% YoY), respectively. Generation was up 4.3% YoY, mainly due to 13% increase in thermal while hydro generation declined 15% due to lower water availability.

Net debt increased by Rs3.6bn QoQ to Rs65.6bn due to capex during the quarter and higher debtors QoQ. Commissioning of under construction RE projects will be in parts starting 225MW solar in Q4FY22, aiding the company transitions from majority coal to majority green player. The current price, in our view, factors in the entire 20GW capacity to be added by FY30 at 10x EV/EBITDA, and given the rich valuations we maintain SELL.

JSWEL’s Board has also approved evaluating options for reorganising the company’s green and grey businesses. A back-of-the-envelope calculation taking 20GW increases EBITDA from Rs29bn in FY21 to Rs140bn by FY30. Even assigning EV/EBITDA multiples of 9x to consolidated business or 8x/10x separately to grey/green businesses (discounted to FY24), per share value comes out to Rs207 – Rs240.

* Steady quarter: Consolidated generation increased 4.3% YoY to 5,141MUs. Volumes were higher YoY at Vijaynagar, Barmer and Ratnagiri by 81%/5.4%/1.8%, but hydro volumes were down 14.6% YoY due to lower water flow. Revenue was impacted due to job work/tolling arrangement impact (no EBITDA impact). Interest cost was up 13% QoQ due to one-off charges as the company replaced its rupee denominated JSW Hydro loans with US$ denominated green bonds. Receivables, up Rs6bn QoQ to Rs19bn due to seasonal hydro requirements and poor collections due to lockdown, are expected to reduce Q2FY22 onwards. Net debt increased by Rs3.6bn QoQ to Rs65.6bn due to capex and decline in cash. Cost of debt declined further 16bps QoQ to 8.05%.

* RE projects progressing well: 2.5GW of green projects with total capex of Rs158bn are under construction currently – 1) SECI-IX 810MW wind hybrid (PPA for balance 270MW signed), 2) 958MW group captive RE (LT PPA with JSW Steel signed for the entire capacity), 3) 240MW Kutehr HEP (Rs18bn committed; Rs6.5bn spent; construction in full swing), and 4) 450MW SECI-X (PPA to be signed in Q2FY22). The RE projects will be commissioned in parts over FY22-23 and have a blended tariff of Rs3.31/unit.

* Company announces Board approval for assessing business reorganisation: JSWEL’s Board has approved evaluation of options to reorganise the company’s green (renewables) and grey (thermal) power businesses. Board has mandated financial, legal advisors and valuers to suggest the course of actions, expected to be presented in the next 90-120 days, after which the company will take the necessary decisions and approvals. Back-of-the-envelope calculations estimate increase of company’s EBITDA from Rs29bn in FY21 to Rs140bn by FY30 at 20GW.

Even assigning EV/EBITDA multiples of 9x to consolidated business or 8x/10x separately to grey/green businesses and discounted to FY24, per share value comes out at Rs207-Rs240. Although the company is highly competitive in operations, renewable bidding market seems over crowded currently with very strong players financially competing.

* Valuation: We maintain our SELL rating and target price of Rs130. Green hydrogen collaboration announcement is a good step; however, estimating revenue potential looks difficult at this stage. We await company’s decision on reorganisation.

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