JSW Energy Rating ‘Buy’; Q2 impacted by lower merchant sales

JSW Energy’s (JSWE’s) Q2FY21 results reflect the impact of lower merchant sales volumes on the back of drop in power demand and merchant prices. However, this was partly offset by operational efficiency measures. At consolidated level, Ebitda was down 1% y-o-y to Rs 9.2 bn. Net debt (excl. acceptances) continued reducing (by ~Rs 8.2 bn during the quarter). Interest cost has also decreased by 24% y-o-y. Further, FCF generation is expected to be robust as ~80% of JSWE’s capacity is under long-term PPAs. Maintain Buy with TP of Rs 73/share (earlier Rs 64), broadly led by higher value of its stake in JSW Steel.

S/A performance impacted by lower merchant sales: Short-term sales volumes were down 85% y-o-y to 110MUs. Reported PAT was flat y-o-y at Rs 3.5 bn. Hydro generation was flat y-o-y while Ebitda was up 4% y-o-y at Rs 5.1 bn. Ebitda at Barmer was down 9% y-o-y at Rs 2.5 bn. Receivables are elevated at Rs 21.8 bn.

Healthy cash flow generation: SWE has taken its first big step toward Renewables with the LOA for SECI’s 810MW blended project. However, with PSA yet to be signed, we do not bake in the same. ~80% of JSWE’s 4.4GW capacity is under long-term PPAs. Further, interest cost savings and operational efficiencies have helped to partly offset lower merchant volumes. We raise our FY21/22e estimates by 12/7% on account of these. Maintain Buy.