There have been concerns about the potential acquisition of JSPL’s Tamnar-I (1GW) coal-based power project by JSW Energy, as per media reports. If the reports prove true, this would represent a departure from management’s current acquisition philosophy of acquiring cash-generating assets or ones that do not strain current cash flows or the balance sheet. We reckon that acquiring Tamnar-I at `54 billion (as reported) could lead to a -34% impact on current earnings given low realisation, low PLF, no coal and no PPA for Tamnar-I. We calculate that breakeven would be likely only at an `25–30 billion acquisition cost, and 70-80% utilization, in the current operating environment.
JSW management was prudent in its last big-ticket acquisition of JP’s hydro projects. First, it ensured that it was buying cash-generating assets, which have the ability to service the acquisition debt and still generate returns. Second, management covered risks in the acquisition cost for uncertainties like project cost approval of Karcham or loss of the hydro season due to delays in closing the deal.
In our view, JSW is best placed to gain from the tailwinds of lower coal prices and benign currency in near-term results. We reiterate our ‘Buy’ rating with 49% upside potential to our `100/share TP. Key risks – unreasonable group-linked acquisitions, higher coal prices, FX volatility, and South power demand remaining weak.