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Maintain ‘Buy’ on JSW Energy: IIFL

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.

By: | Published: September 22, 2016 6:12 AM

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.

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