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Concerns regarding the battery storage project overdone

JSW Energy (JSWE)’s share price has corrected ~18% over the past month amid a wider sell-off in the power utility space, which is likely attributable to the slower growth in power demand for 3QFY25. Regulatory uncertainty related to the battery storage project has also weighed on the stock. Consequently, we cut our FY26/27E EBITDA by 3%/4% as we: 1) remove earnings contribution from the 500MW battery energy storage project and 2) include earnings contribution from the acquisition of 125MW RE capacity from the Hetero Group. We also do not ascribe any value to the battery storage project in our SoTP valuation now. Reiterate BUY with a revised SoTP-based TP of INR790.

Battery project uncertainty and soft power demand weigh on the stock

* JSWE’s share price has been under pressure recently, down ~18% over the past month (vs. NTPC -12.5%, TPWR -16.7%, and PWGR -13.3%). We believe recent weakness is part of a broader sell-off in the power utility space, which in turn is likely attributable to a deceleration in power demand growth from 8- 9% to ~5-6% recently.

* Further, the recent regulatory uncertainty related to the group’s battery project has contributed to the share price volatility. We note that in a regulatory setback recently, the Central Electricity Regulatory Commission (CERC) declined to adopt the proposed tariff for the 500MW battery energy storage project contracted with the Solar Energy Corporation of India Limited (SECI). The CERC, in its order dated 2nd Jan’25, cited misalignment of the proposed tariff with prevailing market prices due to delays by SECI. JSWE, according to a company press release (link), is in the process of filing an appeal against this decision.

Limited impairment risk; 4% of FY26E EBITDA attributable to the project

* The 500MW battery energy storage project in question was expected to contribute ~4-5% to JSWE's EBITDA in FY26/27.

* Despite the recent regulatory setback, we believe the risk of impairment appears to be low, as ~40% of the project's capacity (200MW) was intended for merchant operations, which is not affected by this decision.

* While we seek greater clarity from management, post-3Q result, regarding any battery-pack-related capex incurred, we believe JSWE can redeploy the battery pack in alternative projects.

Limited downside risk on stress testing valuations

* We currently value the thermal and RE assets at 10x and 15x FY27 EBITDA, respectively. The valuation for RE assets is at a slight discount to the valuation multiple for NTPC Green despite: 1) higher PPA coverage for the awarded pipeline, 2) a better execution track record, and 3) an established wind track record, which is key to sustaining returns by up-trading into complex tenders (link).

* In our stress case, we adjust the valuation multiples downward to 7x from 10x for thermal and 12x from 15x for RE, which results in a TP of INR551, representing downside of 2% from current levels.

JSWE moves one step closer to acquisition of KSK Mahanadi

* On 13th Jan’25, JSWE received a Letter of Intent from the resolution professional as its resolution plan for KSK Mahanadi Power Company Limited (KMPCL) was approved by the Committee of Creditors. KSK Mahanadi, a thermal asset with 1.8GW of operational capacity (95% of which is tied up under long- and medium-term PPAs), also offers an additional 1.8GW scope for brownfield expansion.

* JSWE has agreed to acquire KMPCL for a consideration of INR159.9b, implying an estimated EV/EBITDA multiple of ~6x. The completion of this transaction is contingent upon obtaining necessary regulatory approvals, including from the National Company Law Tribunal (NCLT) and the Competition Commission of India (CCI).

We cut our FY26/27E EBITDA by 3/4%; SoTP-based TP revised to INR790

* We revise our earnings estimates for JSWE to reflect the recent developments. We have included earnings contribution from the acquisition of the 125MW RE capacity from Hetero Group. In addition, we have removed the earnings contribution from the 500MW battery energy storage project as we await further clarity. We also do not ascribe any value to the battery storage project in our SoTP valuation now.

* These changes result in a 3%/4% reduction in our EBITDA estimates for FY26/ FY27, and a corresponding 2% decline in our SoTP valuation, leading to a revised TP of INR790. Reiterate BUY.

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