Buy JSW Energy Ltd For Target Rs.705 by Motilal Oswal Financial Services Ltd
KSK Mahanadi – A deep-dive analysis!
* We conducted a deep-dive analysis of KSK Mahanadi Power Company (KMPCL), a thermal (operational: 1.8GW + 1.8GW expansion) plant that JSW Energy (JSWE) is considering for acquisition. Our key conclusions: 1) we estimate an NPV/sh of INR27 for JSWE’s share of 74% (with a brownfield expansion option); 2) without a brownfield expansion, we estimate the NPV at INR16/sh; 3) for every INR0.2/unit change in EBITDA/unit (~8%), NPV is impacted by 33% (this is key as over time JSWE may look to capture synergies and raise EBITDA/unit); 4) for every 5% change in PLF, NPV is impacted by 31% (base case PLF: 70%); and 5) while investors are concerned about leverage, we believe the ND/EBITDA ratio for FY26 will rise only marginally to 5.6x (current estimate: 5.1x) and could decline slightly in FY27.
* Key risks to our estimate: 1) we assume an additional 1.8GW capacity to commence operations by FY29 with an estimated capex of INR189b; potential cost overruns/delays will impact NPV, 2) Power Purchase Agreement (PPA) with TANGEDCO is set to expire in FY29; we assume renewal at INR5.4/kwh with another off-taker, and 3) the plant has some contingent liabilities amounting to INR4.02b; we need clarity from the management on whether JSWE would be liable in the event of an adverse outcome on these.
* We reiterate our BUY rating with an SoTP-based TP of INR705; KMPCL’s NPV is currently not a part of our SoTP valuation. The cut in our TP is driven by lower valuation multiples for the thermal and hydro businesses.
KMPCL would be acquired by JSWE at ~INR160b
* On 13th Jan’25, JSWE announced that the resolution plan submitted by it has been approved by the Committee of Creditors, and it has received the Letter of Intent (LoI) from the Resolution Professional (RP) for KMPCL. Company has now received National Company Law Tribunal (NCLT) approval while the Competition Commission of India (CCI) approval is awaited. The acquisition is expected to receive final approval by 1QFY26.
* KMPCL, a 3.6 GW coal-fired power plant in Chhattisgarh, which includes 1.8 GW of operational capacity and an additional 1.8 GW in brownfield expansion potential, is to be acquired by JSW Energy for INR159.9b. JSW has also committed to providing lenders with a 26% equity stake in the company.
* The project, which had been facing significant financial distress, carries a debt of INR293.3b and was admitted into the Insolvency and Bankruptcy Code (IBC) process in 2019.
* The RP has acknowledged claims of INR293.3b from financial creditors. Lenders are expected to recover ~INR264.85b, representing about 90% of the total claims. This includes JSW’s offer of INR159.9b, as well as INR105b in cash and undisputed fund receivables. However, factoring in the 26% equity stake provided to lenders, the total recovery is expected to exceed 100%, as noted by a lender involved in the process (Link).
Key points about the asset
* KMPCL operates a 3,600MW thermal power plant in Chhattisgarh, with three 600 MW units currently operational, totaling 1,800 MW. The company has PPAs with UPPCL (1,000 MW net), TANGEDCO (500 MW net), and CSPTCL (5% of net power export). The remaining 90 MW capacity is sold through short-term arrangements to IEX as well as other DISCOMs. The coal required for this untied capacity used to be procured through e-auctions and open market purchases but now we understand that the company has arranged for a long-term supply of coal.
* In addition to the existing capacity, KMPCL has an under-construction expansion of 1,800 MW (comprising three 600 MW units), with one unit 40% complete and the balance of plants in place for the remaining 1,200 MW. The plant has firm arrangements for water and coal transportation for the full 3,600 MW capacity.
Stock performance (one-year)
Estimated NPV of INR27/share with brownfield expansion
* We estimate the NPV for JSW Energy's 74% stake in KMPCL to be ~INR27/share, factoring in the brownfield expansion.
* The RoE for KMPCL is projected at 6%/1% in FY27/FY28, while the RoCE is estimated at 2%/0.5%. The decline in these metrics in FY28 is attributed to the 1.8 GW brownfield expansion, which is leading to an increase in debt. However, both RoE and RoCE are expected to improve to 15% and 8%, respectively, by FY32 as revenue generation from the additional 1.8 GW capacity commences from FY29 onwards.
* Our key assumptions include:
* Tariff rates for UPPCL and TANGEDCO at INR5.4/kWh and INR4.2/kWh, respectively.
* Upon the expiry of the TANGEDCO PPA in FY29, we assume the new agreement with the buyer to be at INR5.4/kWh.
* With the Fuel Supply Agreement (FSA) now in place, we assume an EBITDA of INR 2.5/unit. This is in line with what the company reported in FY24.
* Brownfield Capital Work in Progress (CWIP) is at ~INR45b according to the FY23 financials, and this is key to bringing down the overall cost of the 1.8GW expansion for JSWE.
* Capex of INR60m/MW is assumed for the 600 MW unit, which is already 40% complete, while INR90m/MW is assumed for the remaining two 600 MW units, with expenditure to occur between FY27-28 and capitalized from FY29.
* The brownfield expansion is expected to be completed by FY29, with a debt-toequity ratio of 75:25 for the expansion.
* Interest cost is assumed to be 8.8%.
* The cost of equity is assumed to be 12%.
* PLF for the existing 1,800 MW capacity is assumed to be 70% until FY28, with a gradual ramp-up in PLF post-expansion: FY29 at 50%, FY30 at 60%, and 70% from FY31 onwards.
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