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JSW Energy rating: Add; SECI Letter of Awards a positive development

TP raised to Rs 66 from Rs 60; downgraded to ‘Add’ given the recent run-up in stock price

JSW Energy rating: Add; SECI Letter of Awards a positive development
We introduce FY23 estimates revising JSWEL’s target price upwards to Rs 66 (from Rs 60) but downgrade to Add due to the recent stock run-up.

JSW Energy’s (JSWEL’s) 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 Rs 47-48 bn 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 Rs 66 (from Rs 60) but downgrade to Add due to the recent stock run-up.

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 Rs 9/sh (RE) and Rs 15/sh (IBU), resulting in a TP of Rs 90/sh. However, due to uncertain near-term timelines – SECI has not been able to sign some PSAs with discoms recently, 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 Rs 4 bn to annual earnings (Rs 2.4/sh EPS).

Sufficient cashflow: For the two assets, equity requirement in the next two years will be Rs 18 bn. For FY21-23, cumulative FCF after considering Rs 1.5/sh dividend per annum comes to Rs 22 bn. Hence, there will be sufficient internal accruals for growth requirements, without affecting dividends.

Valuation: We introduce our FY23e estimates for JSWE. We increase our TP to Rs 66/sh, mainly due to upward revaluation of the value of JSW Steel stake, but downgrade from BUY to Add due to the recent run-up in the stock price. Both RE as well as IBU have high option values (Rs 9/sh and Rs 15/sh, respectively) and we will incorporate them in our estimates when their addition becomes certain.

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