MOSL: JSW ENERGY (Downgrade to Sell)-Venturing into electric vehicle business-Shrinking FCF and rising risk will de-rate

​JSW Energy: Venturing into electric vehicle business; Shrinking FCF and rising risk will de-rate; Downgraded to Sell

(JSW IN, Mkt Cap USD1.6b, CMP INR64, TP INR49, 24% Downside, Downgrade to Sell)

• JSW Energy’s (JSWE) 1QFY18 operating performance was in-line. Merchant power sales were weak, fuel cost increased but hydro power generation was strong on better availability of water. Simultaneously, JSWE announced venture into electric vehicle space with investment of INR35-40b over the next three-years. Although it is a very promising space, yet there is no visibility of payback in next 3-5 years. This changes the risk profile of company, which may irk existing minorities and de-rate the stock. Further, JSWE has given ICD of INR10b to JPVL, which is an NPA in the books of banks. The visibility of acquisition of Bina and EUP1 of JPL too has reduced. SOTP has reduced to INR49/share on shrinking FCF and rising risk profile of investments. Downgrading to Sell.

1QFY18: Weak demand and rising coal import prices hurting

• JSW Energy’s (JSWE) EBITDA declined 22% YoY to INR8.7b (in-line) due to higher fuel cost and lower merchant sales. Other income grew 146% YoY to INR1b, led by interest on loan/advance given to JPVL and JSPL. Finance cost declined 8% YoY to INR3.9b on lower interest rate. PAT declined 41% YoY to INR2.2b.
• Generation was unchanged YoY at 6,400MU. Generation declined ~21% YoY at Ratnagiri due to maintenance shutdown and lower merchant sales, but was offset by higher generation in hydro.
• Fuel cost in standalone rose 32% YoY to INR3.05/kWh on higher international coal prices. Rajwest EBITDA declined 18% YoY to INR2.3b on adjustment pursuant to the recent tariff order, which is recurring in nature. Hydro EBITDA grew 27% YoY to INR5b on higher generation and late payment charges.