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Wind capacity advantage & PPA visibility: Key differentiators vs peers

Focus on sustaining returns in 2025; cash flow visibility

* While the 2024 YTD witnessed a broad-based rally, with the five power utility stocks in our coverage up 7-52%, we believe that in 2025, the valuation premium commanded by Renewable Energy (RE) generation players will be a function of: 1) the ability to sustain returns by up-trading into niche business models, e.g. Firm and Dispatchable Renewable Energy (FDRE), and 2) the ability to maintain high earnings/cash flow visibility, given the ongoing delays in PPA signings that have recently plagued the sector (link).

* On both these parameters, we highlight JSW Energy (JSWE) as our preferred pick in the power utility space. The company is set to raise its installed capacity to 20 GW (ex-KSK Mahanadi acquisition) by FY28-end (2QFY25-end: 7.7GW). JSWE’s strong experience of operating wind assets (2.1GW operational vs 0.1/1.6GW for NTPC Green/Adani Green) is key to up-trading into FDRE bids, where tender announcements have been strong at ~9GW in 2024 YTD (2023: 11GW). With returns from plain vanilla solar/wind projects becoming commoditized, we believe FDRE tenders are critical for sustaining mid-to-high teen equity returns. Moreover, despite recent concerns over delays in PPA tie-ups, JSWE has secured PPAs for 66% (7.7GW) of its RE pipeline vs 34%/37% GW for NTPC Green/ Acme Solar, respectively.

* Our SOTP-based target of INR816 for JSWE values the renewable business at 15x FY27 EBITDA, the thermal business at 10x FY27 EBITDA, and the hydro business at 3x FY27 book value. We also highlight INR60 in option value relating to the KSK Mahanadi acquisition and INR57 relating to O2 Power acquisition (link).

JSWE’s wind capacity advantage positions it strongly to win FDRE tenders

* Over 11 GW of FDRE tenders were issued in 2023, and this figure has remained strong at 9 GW till Dec’24, driven by nodal agencies such as SECI and SJVN. Given the need of discoms to meet base demand, we believe FDRE tenders could dominate future bids, becoming the preferred tendering model (over plain vanilla RE) for renewable energy procurement.

* FDRE tenders typically involve solar + wind + battery deployment. As such, an established track record in operating wind assets is crucial for successfully executing these tenders. As of 2QFY25, JSWE's total operational capacity was 7.7 GW, with wind accounting for 28% (2,166 MW). This places JSWE ahead of peers such as NTPC Green, where wind accounts for just 3% of operational capacity (100MW as of 1HFY25-end), and Adani Green, where wind accounts for only 15% (1,680 MW).

* While there have been recent concerns that solar + storage could replace the need for wind, ReNew, a leading RE player in India, estimates that adding wind to solar + storage reduces the levelized cost of energy by INR0.2- 0.3/kWh and leads to ~1% higher project IRR.

Stock Performance (1-year)

Strong PPA backing ensures earnings/cash flow visibility

* JSWE recently secured 445MW of C&I projects, bringing its total locked-in generation capacity to 20 GW. This includes 7.7 GW of operational capacity, 2.1 GW under construction (with commissioning expected by FY25-end), and a robust RE pipeline of ~10.2 GW. Note that this excludes 1.8 GW attributable to KSK Mahanadi, where JSWE’s proposal has been declared the highest financial proposal received by the Resolution Professional.

* While there have been recent concerns around generation companies struggling to secure PPAs (link), JSWE has secured long-term PPAs for 66% (7.7GW) of its RE pipeline, with only 3.9GW of capacity still awaiting PPAs. This compares favorably with peers such as ACME Solar and NTPC Green, which have secured PPAs for 37% (1.6GW) and 34% (4.5GW) of their respective RE pipelines. Further, of the 3.9GW awaiting PPAs for JSWE, 1.5GW is related to Group captive projects while only 2.4GW pertains to third parties.

Valuation premium seems well-deserved in light of recent IPOs

* Historically, key investor pushback on JSWE has been centered around premium valuations, with the implied valuation for the RE portfolio at 15x EV/EBITDA (assuming thermal EBITDA is valued at 9-10x EV/EBITDA).

* In our SOTP-based valuation, JSWE's RE portfolio is valued at 15x FY27 EV/EBITDA (FY28 EBITDA discounted by one year). This valuation aligns closely with NTPC Green Energy, which is currently trading at ~16x FY27 EV/EBITDA.

* We acknowledge NTPC Green’s superior financing cost advantage, with up to 1- 1.5% lower borrowing costs over JSWE. However, we believe JSWE has an edge over NTPC Green due to its established track-record in operating wind assets, inhouse EPC, and O&M, which help save costs and provide higher PPA visibility for its under-construction pipeline. JSWE’s diverse capabilities also better position it to protect IRRs, especially as returns in plain vanilla solar/wind projects have been under pressure.

* According to our estimates, JSWE is trading at 13x FY27E vs 16x for NTPC Green.

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