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Miss on account of higher operating and finance costs

Scaling up in Renewables, but current valuations capture upcoming plans

* JSW Energy (JSWE)’s results reflect the impact of higher operating and finance costs, leading to lower profitability. At the consolidated level, EBITDA was down 6% YoY to INR7.0b, 7% below our estimate of INR7.5b.

* 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). PPAs have been signed for SECI IX (810MW) and captive projects (958MW). However, even as we build in the successful commissioning of 2.2GW of RE projects over the next 2–3 years, the current price rightly factors this in. We roll forward our valuation to FY24, with revised Target Price of INR180/sh (earlier: INR130/sh). We maintain our Sell rating on the stock.

Profit miss on higher-than-expected O&M expenses and interest costs

* JSWE's 1QFY21 EBITDA was down 6% YoY to INR7.0b (v/s our estimate of INR7.5b). The miss on our no. was on account of higher-than-expected other expenses. Other expenses were up 55% YoY to INR1.3b, weighed by higher repair and O&M costs.

* Interest costs increased 13% QoQ / 21% YoY to INR2.9b (est. INR1.9b) on account of an INR0.9b prepayment and certain write-offs on INRdenominated loans related to JSW Hydro. Other income was up 62% YoY to INR1.3b on higher late payment surcharge (LPS) income. PAT was down 6% YoY to INR2.0b (our est: INR2.6b).

* Hydro generation was down 15% YoY, with EBITDA for the segment declining 14% YoY to INR2.8b. EBITDA at Barmer declined 15% YoY to INR2.3b (v/s INR2.8b in the previous year).

* Net debt increased to INR65.7b (v/s INR62.1b at end-FY21). Receivables declined YoY to INR19b (v/s INR27b in 1QFY21), but were higher than FY21 levels (INR13b).

Management commentary highlights

* The co. has entered into a framework agreement with Fortescue for collaboration on and the scoping of green hydrogen. With scalability, lower power costs, and improved efficiency, JSWE expects the cost of green hydrogen to come down and be lower than grey hydrogen over the next 5– 7 years.

* JSWE has also taken in-principle approval from the board for the reorganization of its Green (hydrogen) and Grey (thermal) Power businesses. A sub-committee would evaluate the potential options and viability for the separation of these businesses.

* JSWE has signed PPAs for SECI IX (810MW) and captive projects (958MW). The co. expects SECI X (450MW) to be signed in 2Q. Works at Kutehr are ongoing, and the co expects the project to be commissioned by 2QFY25.

Current price bakes in upcoming projects; maintain Sell

* The co. has plans to build a presence in the Renewables space, with plans to reach 10GW of overall capacity by FY25 (v/s 4.5GW currently). With 1) a healthy balance sheet position (net debt/equity: 0.5x) and 2) JSWE’s current capacity generating strong cash flows (~87% of JSWE’s 4.5GW is under long-term PPAs), the company does have room to grow. However, even as we build in the successful commissioning of 2.2GW of RE projects over the next 2–3 years, the current price rightly factors this in. Its plans for green hydrogen are in the initial stages, and with little clarity on capital commitments and production, we do not account for it.

* We roll forward our valuations to FY24 and raise our SOTP-based Target Price to INR180/sh (earlier: INR130sh), capturing a) the addition of Kutehr (240MW), and b) an increase in value for JSWE’s stake in JSW Steel . However, with the sharp run-up in the stock over the past three months, the possible value-accretion is captured more than adequately. Accordingly, we reiterate our Sell rating on the stock.

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