JSW Energy (JSWE) has successfully consummated the acquisition of two hydro assets of Jaiprakash Power Ventures Limited (JPVL) and it is on track to pursue its inorganic growth aspirations. A strong balance sheet (net D/E<1.4x on FY17ii) and rising share of long-term PPA contracts in overall capacity lower acquisition risks considerably and de-risk the revenue model from volatility in spot prices of power and coal. However, delay in finalisation of a medium-term PPA with Karnataka SEB would hurt FY17ii earnings (25% cut), which we believe is priced in adequately.
JSWE has successfully consummated the acquisition of two hydro assets of JPVL. Its non-contracted (spot) capacity now reduces to 34% vs. 47% in FY15, and this could come down further with finalisation of medium-term PPA with Karnataka SEB in which it has L2 status (750MW at `4.38/unit). Delay in finalisation of the PPA (myopic decision making by SEBs- lower seasonal demand, enhanced supply of wind and hydro) constrains JSWE from contracting capacity elsewhere. Deferment/cancellation of PPA will allow JSWE to sell power elsewhere. We envisage a favourable risk-reward and maintain ‘buy’. A runaway increase in benchmark coal prices/rupee depreciation is the key risk.