JSW Energy - Capex cycle commences - ICICI Securities

JSW Energy's (JSWEL) Q3FY21 consolidated revenue/EBITDA/reported PAT came in at Rs16.1bn/Rs6bn/Rs1.2bn, lower 23.4%/5.3%/69% YoY (adjusted PAT lower by 4% YoY), respectively. Long-term (LT) generation improved 6% YoY, mainly boosted by Barmer. Earnings were impacted due to: 1) Lower merchant volumes (mainly Ratnagiri) and prices, partially offset by lower fuel cost, 2) lower other income, and 3) lower interest cost. JSWEL's net debt reduced further by Rs9.5bn QoQ (Rs22.3bn in 9MFY21) to Rs67.2bn, and as per the management, with net D/E at 0.5x, net debt has reached its bottom and capex cycle has begun. JSWEL will set up 2.1GW of RE + hydro capacity at a cumulative capex of Rs140bn. For 810MW SECI hybrid project, PPA for 540MW is expected to be signed in FY21 and balance in Q1FY22. The project is likely to commission in parts over FY22-23 (FY24 is expected to be the first full year of operations). We incorporate the same in our SoTP and increase our target price to Rs75 (Rs69 earlier). Maintain HOLD.

- Higher offtake from LT customers supports numbers: Consolidated generation increased 0.7% YoY to 4,613MUs, wherein although ST sales declined significantly (by 42% to 312MU), LT generation increased (by 6% to 4,300MU). Sales were lower YoY at Vijaynagar and Ratnagiri by 31%/4%, but higher at Barmer by 28% YoY due to higher offtake from discoms. Hydro generation was lower by 4% YoY. Revenue was impacted since few existing LT customers (at Ratnagiri) migrated to job work/tolling arrangement (no EBITDA impact). Interest cost was down 27% YoY due to reduction in net debt by Rs9.5bn QoQ to Rs67.2bn, while other income also declined. The company intends to tie-up the balance 13% untied capacity in next 2-3 years, as a result, merchant prices will have negligible-to-no impact going forward.

- Receivables decline significantly; JSPL settles loan: Receivables declined 22% QoQ to reach Rs16.9bn (7-quarter low) while overdue declined 30% QoQ (~40% of total receivables are overdue). The company expects PFC/REC scheme disbursals to help reduce its receivables further. JSPL completely settled the loan from JSWEL, which amounted to Rs2.5bn at the end of FY20 including interest.

- Deleveraging cycle complete; capex cycle begins with focus on RE: With net D/E reaching <0.5x through substantial deleveraging and Rs16bn cash in hand, management indicated that the next leg of capex targeting primarily RE/hybrid/hydro asset addition has started. 2.1GW of RE + hydro with total capex of ~Rs140bn is to be set up - 1) SECI IX 810MW hybrid (Rs48bn), 2) 1-1.1GW group captive RE (Rs47-62bn), 3) 240MW Kutehr HEP (Rs27bn). In case of SECI hybrid project, PPA for 540MW is expected to be signed within FY21 and balance 270MW in Q1FY22. The project will be commissioned in parts (of 50MW each) over FY22-23, with FY24 expected to be the first full year of operations. JSWEL will continue to participate in upcoming RE projects, investing 25-30% equity and targeting mid-teen IRRs at P90 generation profiles.

- ESG rating improves: MSCI upgraded the company's ESG rating to 'BB', which is also amongst the highest for an Indian power producer with thermal portfolio.

- Valuation: We maintain HOLD but revise our target price to Rs75 (Rs66 earlier), incorporating the 810MW hybrid project in our SoTP valuation. Further, IBU, whose resolution plan continues to remain pending at NCLT has high option value (Rs15/sh).

Shares of JSW Energy Ltd was last trading in BSE at Rs.71.4 as compared to the previous close of Rs. 73.8. The total number of shares traded during the day was 497791 in over 3334 trades.

The stock hit an intraday high of Rs. 76.2 and intraday low of 71. The net turnover during the day was Rs. 37074514.

Source : Equity Bulls

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