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MOSL: JSW ENERGY (Neutral)-Scraps electric vehicle plans-To use FCF for growth opportunities in power sector

JSW Energy: Scraps electric vehicle plans; To use FCF for growth opportunities in power sector; Maintain Neutral

(JSW IN, Mkt Cap USD1.7b, CMP INR69, TP INR77, 11% Upside, Neutral)

 

Decision to not pursue electric vehicle business

• JSW Energy (JSWE) has announced that it will no longer pursue the electric vehicle (EV) venture. In a statement, the company attributed it to ‘higher than anticipated uncertainties associated with the EV business,’ while stating that it would rather ‘maintain capital cushion for growth opportunities in Power and other related businesses’. JSWE had earlier envisaged an investment of ~INR65b for EVs (~30% if its capital employed in FY18). It had spent ~INR250m in setting up a team to evaluate the EV business. 

Clarity on capital allocation is positive

• After a bold diversification announcement and the promoter publicly expressing his desire for an automotive business (), such a turn in event is testament to the fact that the promoters/management will not pursue opportunities where they believe the returns/risks are not balanced. It reinforces confidence on the company’s prudent capital allocation approach. Now with a clear focus for growth in the Power sector, we believe that JSWE is the best play on the consolidation theme in the Power Generation sector. Its net debt to equity is ~1.1x and net debt to EBITDA is ~4x, the lowest amongst listed private power sector players. ~80% of its 4.4GW capacity is under long-term PPAs and generate predictable cash flows. Another ~7% could soon get tied-up through the long-term PPA under group captive, further de-risking cash flows. We note that there are at least ~19GW of operating power generation capacities in India, which are under financial stress. These assets will need to be resolved if the power market must function smoothly. We believe consolidation is imminent and JSWE with its strong balance sheet, experience and few competing players is amongst the best positioned.