JSW Energy (JSWE) has signed a share purchase agreement to acquire GMR Kamalanga (1,050MW). The deal is valued at a maximum amount of INR53b (implying an EV of INR51m/MW). We see the transaction as value accretive for JSWE, given the strategic location of the plant, room for merchant volumes, and the company’s ability to reduce interest and O&M costs post acquisition. Moreover, the move lends visibility to JSWE’s capital deployment. We raise our FY21/22 EPS estimates by 15/8% to account for the takeover of Kamalanga from FY21. Upgrade to Buy with a TP of INR78/sh (23% upside).
A weak generation profile for the Vijaynagar plant for the third consecutive year, coupled with rising cost (and lower margins) has implied that JSW Energy has yielded single-digit returns yet again in FY19. Shelving of the investment plans for electric vehicle planning helped allay investor concerns, even as drop in prices of imported coal could provide incremental tail-winds. We revise our rating to Hold from Reduce and value at a P/E of 10x on FY21E EPS with a target price of Rs.73.
We have cut the capex 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 INR162b in FY16 to INR130b 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 INR7.6b/INR9.2b for FY20E/21E on lower interest cost. We value JSWE on SOTP basis; the long-term PPA capacities on DCF and merchant capacities at INR40m/MW. The target price is raised to INR77/share (Exhibit 7), on lower net debt. Maintain Neutral. JSWE has a strong balance sheet to benefit from consolidation in the generation sector, but value creation will be subject to when and at what value it will be able to conclude deals.