But for the recent dip, power stocks have been on a roll the past several months thanks to the pick-up in economic activity and the accompanying rise in power consumption. The sector has also attracted much attention with many leading players laying out ambitious plans for expanding their renewable power capacities in a big way. Among these is JSW Energy, one of the larger private sector power companies in the country.

Despite the 21 per cent fall since mid-October in line with the broader market correction, the JSW Energy stock is up over 700 per cent from ₹39 apiece in May 2020. The company’s shift in focus towards renewable energy is a step in the right direction. Thanks to the growing tilt towards clean energy globally and in India too - where demand is expected to be robust driven by lower-than-before tariffs and renewable purchase obligations by many states - there are many positive push factors for green power. However, a substantial contribution from this (wind and solar) to JSW Energy’s total capacity is still many years away.

For JSW Energy, certainty of buyers for a majority of its existing electricity production, regulated power tariffs that allow cost increases to be passed through, and significantly reduced leverage are some of the key business positives. However, after a sharp run up, the stock appears to be more than adequately pricing in all the positives. Investors, can therefore, consider booking profit in the expensively valued JSW Energy stock.

About business

JSW Energy, a largely thermal-based power producer, is present in power transmission and trading too. The company’s current power generation capacity of 4.6 GW (gigawatts) comprises 3.16 GW of thermal, 1.39 GW of hydro power and just about 10 MW (megawatts) of solar capacity. Today, 86 per cent of the company’s aggregate power capacity is tied under long-term power purchase agreements or PPAs with its customers with a tariff structure that allows for recovery of fixed and variable costs (almost full pass through of fuel costs and forex) for power sold. The fixed capacity charges have to be paid by the buyer, such as a state power distribution utility, even if the intended power is not purchased. This provides revenue visibility to a large extent. For example, power from the company’s 1,080 MW Barmer plant is sold to the distribution utilities in Rajasthan at cost plus tariffs set by the Rajasthan Electricity Regulatory Commission. Power from the Karcham Wangtoo and Baspa-II hydro projects too is sold to state power discoms at tariffs that enable full recovery of fixed cost plus return. This provides long-term revenue visibility.

Apart from this, JSW Energy has also signed long-term PPAs for 90 per cent of the currently under construction renewable power capacity of 2.5 GW. Of this, 2.2 GW of wind and solar projects are expected to be commissioned in the next 18 – 24 months. Driven by renewable energy, JSW Energy plans to expand its current 4.6 GW capacity to 10 GW by FY25 and 20 GW by FY30. Recently, the company’s board approved the reorganization of the business into renewable and thermal business. The former comprising generation, energy storage and green hydrogen is to be put under a wholly owned subsidiary, JSW Neo Energy while the thermal business will continue under the existing company. The move is expected to ease fund-raising for the green business and potentially lead to value unlocking for investors in future.

The company’s net debt to equity ratio of only 0.41 times as of September 2021, down from 0.59 times a year ago, provides it some leeway to raise debt to fund its planned expansions.



Unattractive valuations

Keeping the business positives aside, the stock valuations call for caution. At ₹321 per share, the stock discounts its FY23 earnings by 43 times. This is well beyond its 3-year average price-to-earnings multiple of around 15 times. The stock is expensively valued in terms of the enterprise value to EBITDA metric too. It is trading at a forward EV/ EBITDA multiple of 18.5 times , significantly above its historical average multiple of 7.7 times. This implies much of the postives from the renewables foray are already factored into the valuations. The JSW Energy stock also appears expensive when compared to the Tata Power stock which is trading at a forward P/E mutiple of 30 times and EV/ EBITDA multiple of 12.5 times (multiples for both companies are based on Bloomberg consensus estimates).

Financial performance

Impacted by the shift to job work arrangements with some of its existing long-term customers and lower power offtake, JSW Energy reported a 16.3 per cent (year-on-year) fall in revenue to ₹6,922 crore in FY21. Under this arrangement, coal is provided by the customer for electricity generation in return for job work charges. As a result, both revenue and fuel costs were lower than before. EBITDA fell around 2 per cent to ₹2,907 crore and profit before tax and exceptional items (PBT) rose 5.5 per cent to₹1,081 crore from year ago. For the September 2021 quarter, JSW Energy posted 7.7 per cent year-on-year growth in revenue to ₹2,087 crore backed by higher short-term sales. While EBITDA remained almost flat at ₹929 crore, higher other income helped PBT rise 24.3 per cent to ₹604 crore during the quarter.

Between FY18 and FY20 (normal year before Covid), the company’s revenue grew 1.4 per cent to ₹8,273 crore and EBITDA 3.5 per cent to ₹2,957 crore. Helped by the decline in interest expense, PBT rose 62.5 per cent to ₹1,025 crore. The trend of lower operation and maintenance costs, growing share of long-term power sales and declining merchant sales, as well as reducing net debt over the past few years have served the company well.