Maintain ‘reduce’ rating on JSW Energy with a target price of R103 per share.
While JSW’s growth outlook appears robust, stock is a tad overvalued. The stock trades at 1.7x P/B (BVPS of R64.4) and 9.7x P/E (EPS of R11.1) on our FY17f estimates. Moreover, a potential equity overhang (shareholders’ approval to raise up to R5,000 crore equity; ie, 28% dilution at CMP to fund M&As) may cap near-term price performance.
At R9,380 crore, R3,650 crore, and R1m330 crore normalised revenues, Ebitda and PAT for FY15 are in line with our forecast. While we broadly concur with management’s upbeat earnings outlook for FY16 and JSW’s intent, capability and balance sheet strength to pursue inorganic growth options, we believe that robust FCF prospects, best-in-class RoE and further M&A upside already seem to be priced in.
A sharp reduction in receivables (47 days versus 73 days as of September 2014) and consequent rise in cash/cash-equivalents (R11 per share versus R5 per share as of Sep-2014) is a key positive on the balance sheet as of March 2015.
Going ahead, management expects the receivable realisation cycle to be sustained at around 45-50 days. JSW has declared a dividend of R2 per share (same level as in FY14), implying a payout of 30%.