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High valuation and limited upside

JSW energy is a leading private power generation company in India. JSW energy is part of the USD 23bn JSW Group. The company has a power generation capacity of 6,771 MW spread across a portfolio of thermal (3,158 MW), wind (1,547 MW), hydel (1,391 MW) and solar (675 MW) projects.

• In Q2FY24, JSW Energy reported a revenue growth of 36.5% to Rs. 3,259cr, owing to high power demand and rise in merchant sales.

• EBITDA improved a significant 82.8% YoY to Rs. 2,008cr and EBITDA margin expanded to 62% from 46% in Q2FY23, owing to a 17% YoY fall in fuel costs and a significant rise in tariff.

• Management expects slower performance as household consumption declines during winter season. Further, manufacturing PMI is indicating at a moderating factory activity. Additionally, coal prices can be seen consolidating based on API4 price index at $120/ton and is expected to restrain margins. Given the current headwinds and expensive valuation, we recommend a SELL rating at a target price of Rs. 340 based on 9.0x FY25E EV/EBITDA.

Top line improves backed by upward demand trends

JSW Energy’s Q2FY24 revenue rose 36.5% YoY to Rs. 3,259cr backed by robust demand for power which increased 7% YoY and higher merchant sales with power tariff at Rs. 8.17 per unit in the short term, above the industry average tariff of Rs. 5.90. The rise in demand was supported by a 29% increase in power generation to 8.6bn units owing to renewable power generation. In Q2FY24, the company recorded EBITDA of Rs. 2,008cr (up 82.8% YoY) and cash profit of Rs. 1,180cr — both record highs for the company — owing to a 17% fall in fuel costs and increase in power tariffs. Despite a 151% YoY rise in finance costs, net profit improved 88% YoY to Rs. 857cr

Steadfast capacity improvement in progress

The company started its commercial operations in 2000 with 2x130 MW thermal power plants and is at present in the process of constructing multiple power projects aimed at adding 3 gigawatt (GW) to its capacity. In Q2FY24, the company added 3.5 GW to its capacity and in the year to date 9.3 GW, leading to a total installed capacity of 425 GW. JSW Energy has also signed an MOU with JSW Steel for constructing a 6.2 GW of renewable capacity, 2.7 gigawatt hour (GWh) of storage capacity and 85,000-90,000 of green hydrogen for manufacturing green steel, which will be associated with an additional 1.8 GW of renewable capacity and 1 GWh of storage capacity. This project is expected to be completed by 2030.

Key concall highlights

• The company commissioned 86 MW of SECI-X capacity in Q2FY24, which leads to a total commission capacity of 216 MW year to date. All the 2.4 GW projects are on schedule and are expected to be commissioned in the current quarter.

• Mytrah’s generation has increased 27% YoY and contributed significantly to EBITDA. Company is ahead of limit set for efficiency improvement programmes.

• Ind-Barath’s Unit 1 is expected to be commissioned in November and Unit 2 will be commissioned in Q4FY24.

Valuation

Management expects slower performance as household consumption declines during winter season. Further, manufacturing PMI is indicating at a moderating factory activity. Additionally, coal prices can be seen consolidating based on API4 price index at $120/ton and is expected to restrain margins. Given the current headwinds and expensive valuation, we recommend a SELL rating at a target price of Rs. 340 based on 9.0x FY25E EV/EBITDA.

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