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Strong pipeline and opportunistic acquisitions drive growth

Update our model for recent PPAs; slightly defer capacity build-up

We met with the management of JSW Energy (JSWE) recently. Following the meeting, we update our model to account for projects secured recently and update project estimates for tariff wherever Power Purchase Agreements (PPAs) have been finalized. We also slightly defer the capacity build-up (10GW by endFY25 vs Dec’24 earlier), in line with the guidance provided recently. Lastly, we adjust the profitability of hydro-assets lower to account for the tariff true-up impact, which was there in 2QFY25. Consequently, our EBITDA estimates have been reduced 9%/7% for FY25/26, respectively, while the adjusted PAT estimates have been reduced 11%/10%.

Additional INR60/share upside from KSK Mahanadi

JSWE recently announced its emergence as the top bidder for KSK Mahanadi, a thermal asset (1.8GW operational + 1.8GW scope for brownfield expansion) for a consideration of INR159.9b, implying estimated EV/EBITDA of ~6x, which we think is attractive. On the per MW basis, this acquisition comes at INR89m vs the recent ordering by NTPC (INR120m/MW). The final approval for the acquisition is expected by end-FY25/1QFY26 and as such, earnings from this acquisition have not been built into our estimates. Our current TP is INR810. Should we include the earnings and consequent debt from this acquisition, it would further enhance our TP by INR60/share.

Strong pipeline, established execution, and resilient balance sheet

We continue to reiterate BUY on JSWE with an SoTP-based TP of INR810/share. We remain optimistic, based on 1) the strong visibility of the capacity rising to ~14 GW by end-FY27 from 7.7GW currently, 2) the ability to undertake and turnaround opportunistic acquisitions (Ind-Barath, Mytrah, and now KSK Mahanadi), and 3) the robust balance sheet that allows for sustainable capital investment.

Valuation and view

We value JSWE's core business at 15x FY27 EBITDA, reflecting its strong operational performance and market position. The stake in JSW Steel is valued at a 25% discount to the current market price. JSWE is currently trading at FY27 EV/EBITDA of 14.2x. The total equity value of JSWE was determined by aggregating the values from these different components, leading to a TP of INR810/share. Additionally, note that we see an option value of INR60/share from KSK Mahanadi, which should materialize once the deal is approved.

Strong RE pipeline backed by PPAs; 20GW ambition now within reach

* JSWE has outlined a strategic vision to achieve a total generation capacity of 20GW and energy storage capacity of 40GWh by 2030. In alignment with its sustainability goals, the company is targeting a 50% reduction in its carbon footprint by 2030 and aims to achieve carbon neutrality by 2050.

* Currently, JSWE’s total locked-in generation capacity of 19.2GW comprises 7.7GW operational; 2.1 GW under construction across wind, thermal, and hydro (to be commissioned by FY25-end); and the RE pipeline of 9.3 GW (with longterm PPAs already signed for 5.8GW and LoA/LoI received for 3.5GW).

* Additionally, the company has a locked-in energy storage capacity of 16.2 GWh, which includes battery energy storage systems and hydro-pumped storage projects.

INR60/sh option value from the strategic KSK Mahanadi acquisition

* JSWE has emerged as the top bidder for KSK Mahanadi Power Company Limited with an offer of INR159.85b.

* Located in Chhattisgarh, KSK Mahanadi Power Company operates a 3.6GW coalfired plant with an operational capacity of 1.8GW, while there is scope for another 1.8 GW brownfield capacity expansion

* The project, which faced financial distress with a debt of INR293.3b, was admitted into the Insolvency and Bankruptcy Code (IBC) process in 2019. Other bidders, including Jindal Power, Vedanta, and NTPC Ltd, remained active until the ninth round.

* Assuming an EBITDA of INR2/unit and 80% PLF, we estimate the asset could generate an EBITDA of ~INR25b, which implies that EV/EBITDA will be ~6x for this deal vs NTPC trading at 10x EV/EBITDA.

* Our earnings estimates do not include the contribution from this acquisition. However, if we account for KSK earnings and consequent debt, our TP increases by INR60/share. We expect regulatory approval for the transaction by the end of FY25 or 1QFY26.

Operational capacity to nearly double by end FY27

* JSWE is poised for strong growth, with its operational capacity of 7.7GW set to expand to 10GW by FY25-end, ~11 GW by FY26, and ~14.4 GW by FY27.

* The potential addition of 1.8GW from KSK assets, upon deal completion, further amplifies its growth trajectory, taking the operational capacity to ~16GW by end FY27. Further, FY28 could witness further capacity build-up of ~2-3GW.

* We are building in for EBITDA to reach INR115b by FY27, with a potential for the KSK acquisition to boost it by INR25b and take it to INR140b. Our current EBITDA estimates imply an FY24-27 CAGR of 29%.

Technology licensing agreement with SANY Renewable Energy

* JSWE recently announced its strategic move to venture into WTG blade manufacturing, given its objective of ensuring a reliable and assured supply of critical equipment for its projects.

* In Oct’24, JSWE announced that JSW Renewable Technologies Two Limited, a wholly-owned subsidiary of JSW Neo Energy Limited and a stepdown subsidiary of JSWE, entered into a technology licensing agreement with SANY Renewable Energy Co. Ltd. to manufacture wind turbine blades in India for captive usage by the company.

* This initiative is expected to result in significant cost savings besides ensuring strong quality control and timely supply of equipment. JSWE's current operational wind energy capacity stands at 2.2GW, with an additional 2.8GW of wind projects under construction or in the pipeline, reinforcing JSWE’s commitment to expanding its renewable energy footprint.

Slower-than-expected commissioning a key risk

* Key risks to our earnings estimates and TP stem from 1) the slower-thanexpected commissioning of key projects, 2) weaker-than-expected operational performance for thermal/renewable assets, and 3) weaker-than-expected return profile for renewable projects.

Valuation and view

* We value JSWE's core business at 15x FY27 EBITDA, reflecting its strong operational performance and market position. The stake in JSW Steel is valued at a 25% discount to the current market price. JSWE is currently trading at FY27 EV/EBITDA of 14.2x.

* The total equity value of JSWE was determined by aggregating the values from these different components, leading to a TP of INR810/share.

* Additionally, note that we see an option value of INR60/share from KSK Mahanadi, which should materialize once the deal is approved.

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