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JSW Energy - First big renewable step - ICICI Securities

Posted On: 2020-09-27 23:40:07

JSW Energy's (JSWEL) subsidiary JSW Solar has received Letter of Awards (LoA) from SECI to set up blended wind capacity totalling 810MW (max solar energy blending allowed is 20%). This is a positive development for the company, which has a vision to reach 10GW capacity in the next 4-5 years, especially after the termination of GMR Kamalanga acquisition and prolonged delay of Ind-Barath Utkal's (IBU) acquisition. We now await the signing of PSA by SECI with a discom, after which commissioning will take 18-24 months. Hence, FY24 is likely to be the first full year of operations. Total estimated cost of the project is Rs47-48bn with D/E financing of 75:25. We believe JSWEL will have sufficient cash flows to fund the equity requirement without affecting current dividends. We introduce FY23 estimates revising JSWEL's target price upwards to Rs66 (from Rs60) but downgrade to ADD due to the recent stock run up.

- Details of LoA: JSWEL's subsidiary JSW Solar had participated in SECI's invitation for Tranche-IX TBCB based ISTS-connected blended wind power projects totalling 2,500MW. It has now received LoAs from SECI to set up blended wind capacity totalling 810MW (max solar blending allowed of 20%). We estimate the total project cost at Rs47-48bn and expect D/E financing to be 75/25. At Rs3/kWh tariff, we believe, IRR will range at 14-15% depending on the location and/or PLF. We wait for the signing of PSA between SECI and discoms, after which commissioning will take another 18-24 months. Hence, FY24 may be the first full year of operations. Land acquisition will commence once the PSA is signed.

- High option value in case of both renewables and IBU addition: JSWEL has 810MW organic RE and 700MW Ind-Barath Utkal (IBU) capacity addition in hand. These projects will give additional value of Rs9/sh (RE) and Rs15/sh (IBU), resulting in a target price of Rs90/sh from our current target of Rs66/sh. However, due to uncertain near-term timelines - SECI has not been able to sign some PSAs with discoms recently due to demand estimation uncertainties post Covid-19 pandemic, while IBU acquisition's hearing is pending in NCLT (expected to begin shortly) - we are keeping both as option values. In FY24, we expect both assets to contribute Rs4bn to annual earnings (Rs2.4/sh EPS).

- Sufficient cashflow to meet equity capex requirement and dividend: For the two assets, equity requirement in the next two years will be Rs18bn. For FY21-23, cumulative FCF after considering Rs1.5/sh dividend per annum comes to Rs22bn. Hence, there will be sufficient internal accruals for growth requirements, without affecting dividends.

- On track to meet medium-term capacity target of 10GW: With these two acquisitions, JSWEL's total capacity will increase to 6GW with 36.4% from non-fossil fuel based sources. This bodes well for JSWEL's capacity target of 10GW in 4-5 years with incremental addition coming mainly from renewables.

- Valuation: We introduce our FY23E estimates for JSWE. We increase our target price for JSWE from Rs60/sh to Rs66/sh, mainly due to upward revaluation of the value of JSW Steel stake, but downgrade our rating from BUY to ADD due to the recent run up in the stock price. Both RE as well as IBU have high option values (Rs9/sh and Rs15/sh respectively) and we will incorporate them in our estimates when their addition becomes certain.

Shares of JSW Energy Ltd was last trading in BSE at Rs.57.9 as compared to the previous close of Rs. 56. The total number of shares traded during the day was 32672 in over 382 trades.

The stock hit an intraday high of Rs. 58.55 and intraday low of 55.1. The net turnover during the day was Rs. 1855064.

Source: Equity Bulls

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