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Acquisition of O2 power, fairly priced

JSW Energy acquires RE platform O2 Power with portfolio of 4,696 MW (2,259 MW to be operational by June 2025, 1,463 MW under construction, 974 MW in pipeline, all scheduled for commissioning by Jun’27) at an EV (adj for NWC) of INR 125 bn, the largest acquisition of the company. DCF valuation for the 2,259 MW of RE assets likely to be operational by Jun’25 indicates an implied EV/EBITDA multiple of 7.3x on FY27 earnings, given the recent acquisition of ACME Solar’s 369 MW solar project by Blupine Energy at an EV/EBITDA multiple of 8.7x. Considering the advantages JSW Energy gains through this deal- accelerated addition of 2.3 GW to its RE portfolio, experienced management team, and improved visibility on its 10 GW by 2025 target, we believe the deal is fairly valued. We maintain BUY rating the stock with SOTP-based TP of 759.

* O2 Power: O2 Power is a renewable energy platform which was jointly developed in 2020 by EQT Infrastructure (51% stake) and Temasek (49%). It has total capacity of 4,696 MW – where 2,259 MW will be operational by June 2025, 1,463 MW is currently under construction, and an additional 974 MW are in the pipeline, all scheduled for commissioning by Jun’27, as per guidance from the management. Total portfolio comprises of 910 MW of Firm and Dispatchable Renewable Energy (FDRE), 475 MW of wind power, 1,580 MW of hybrid projects, and 1,731 MW of solar power. The platform has a blended average tariff of INR 3.37/KWh with remaining life of ~23 years. The capacities are spread across seven resource-rich states of India catering to both utilityscale (87%) and Commercial & Industrial (C&I) markets (13%).

* Key Aspects of the Deal:

* The acquisition adds 4.7 GW RE portfolio to JSW Energy, increasing its locked-in capacity by 23% to c.25 GW.

* The operational portfolio of 2.3 GW is valued at 7.3x EV/EBITDA as per our estimates (vs. 8.3x as guided).

* The acquired RE portfolio is expected to achieve a run rate EBITDA of INR 37.7bn at full capacity (4.7 GW) as per our estimates (vs. 37.5bn guided).

* The blended tariff of the O2 Power portfolio stands at INR 3.37 per unit.

* O2 Power’s cost of borrowing is competitive at 8.8%, supported by a strong credit rating.

* Land acquisition is completed for 40% of the under-construction and pipeline portfolio, with visibility for securing land for the entire capacity.

* O2 has connectivity for the entire 4.7 GW portfolio (900 MW approved and 808 MW under approval) giving a higher level of confidence of commissioning by Jun’27.

* Recent industry transaction (ACME Bluepine deal): In Mar’24, ACME Solar divested its 369 MW solar portfolio to Blupine Energy at an EV/EBITDA multiple of 8.7x. The divested assets generated an EBITDA of INR 3.34bn in FY23.

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