JSW Energy has announced it will no longer pursue the electric vehicle (EV) venture. The firm attributed it to ‘higher than anticipated uncertainties associated with the EV business’, while saying that it would rather ‘maintain capital cushion for growth opportunities in power and other related businesses’. JSWE had earlier envisaged an investment of ~`6,500 crore for EVs (~30% if its capital employed in FY18). It had spent ~`2.5 crore in setting up a team to evaluate the EV business.
After a bold diversification announcement and the promoter publicly expressing his desire for an automotive business (link), such a turn of events is testament to the fact that the promoters/management will not pursue opportunities where they believe the returns/risks are not balanced. It reinforces confidence on the firm’s prudent capital allocation approach. Now, with a clear focus for growth in the power sector, we believe that JSWE is the best play on the consolidation theme in the sector. We note there are at least ~19GW of operating power generation capacities in India, which are under financial stress. These assets will need to be resolved for the power market to function smoothly.
We have cut the capex as we were building for EV. JSWE has been deleveraging over the years, given its strong operating cash flows and lack of growth opportunities (net debt down from `16,200 crore in FY16 to `13,000 crore in FY18). We believe until acquisition opportunities emerge, it will continue to deleverage, which will lead to savings in interest cost. We have raised our PAT estimate by 2%/37% to `760 crore/ `920 crore for FY20E/21E on lower interest cost. We value JSWE on an SOTP basis; the long-term PPA capacities on DCF and merchant capacities at `0.4 crore/MW. The target price is raised to `77/share, on lower net debt. Maintain ‘neutral’.