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JSW Energy Ltd Fundamental Analysis : At The Cusp of Green Revolution
JSW Energy, established in 1994, plans a 50% capacity increase to 9.77 GW by FY'26, with 80% focus on renewable energy. Its profitability outlook hinges on power generation growth and leverage benefits post FY’27. The company faces capital-intensive entry barriers and regulatory oversight but maintains a stable customer base, yet high valuations pose a risk due to anticipated growth being factored into current stock prices.
Historically the sales growth rate of the company has been volatile with de-growth in multiple years. Sales growth for the last 9 years is a meager 2% CAGR.
The company has an ambitious capacity expansion initiative, targeting an increase from the current installed capacity of 6.6 GW to 9.77 GW by the end of FY’26, representing a growth of approximately 50%. Notably, a substantial portion of this expansion, approximately 80%, will be dedicated to renewable energy sources such as wind, solar, and hydro power projects. By FY’26, renewables are expected to constitute around 61% of the company's total installed capacity.
Over the next three years, the company anticipates a significant upswing in profitability. It's worth highlighting that this growth will primarily be driven by increased power generation, while further benefits stemming from operating and financial leverage are expected to manifest from FY’27 onward.
The industry presents a high barrier to entry due to its substantial capital requirements for power plant establishment. Setting up a 1 GW plant demands approximately Rs. 5,500/6,000 crores for thermal, Rs. 6,500 crores for wind, Rs. 4,500 crores for solar, and Rs. 12,000 crores for hydro power. Additionally, the sector is subject to rigorous regulatory oversight.
JSW Energy's customer base comprises long-term Power Purchase Agreement (PPA) arrangements, with 21% of its agreements designated as group captive and 64% tied to government entities for durations of 25 years or more. This configuration ensures a stable and predictable cash flow for the company over the long term. The remaining 15% is allocated to the open market, which can yield added benefits, considering that merchant tariffs typically command higher rates.
JSW Energy, headquartered in Mumbai, India, is a leading player in the Indian power sector with a primary focus on electricity generation. Established in 1994, the company specializes in electricity production through various methods, including thermal, wind, solar, and hydro. JSW Energy is committed to expanding its capacity, targeting a 50% increase from 6.66 GW to 9.77 GW by the end of FY'26. Approximately 80% of the upcoming capacity is dedicated to renewable sources, aligning with India's clean energy goals.
The company, starting with a single power plant in Karnataka two decades ago, has expanded its operations across 10 states in India. The focus on business continuity and geographical diversification is complemented by a multi-fuel approach and diverse power offtake arrangements, incorporating thermal, hydel, wind, and solar power sources.
The company's total generation capacity stands at 9.8 GW, with 6.6 GW already installed and 3.2 GW under construction, expected to be commissioned by 2024. An impressive 61% of this capacity is derived from renewable sources. In the energy storage sector, the company has committed to projects totaling 3.4 GWh, with pumped storage and battery energy storage.
Also, the company is venturing into energy products and services with a 1 GW advanced solar module manufacturing capacity and a contracted 3.8 KTPA green hydrogen production facility for green steel manufacturing. Recent acquisitions include 1,753 MW of renewable assets from Mytrah Energy and 700 MW of under-construction thermal capacity from Ind-Barath.
With a reputation for swift project execution, transparency, robust governance, and prudent capital allocation, JSW Energy is transitioning from a pure-play power generator to an energy products and services company.
Under their current strategy, the company aims to achieve 20 GW of installed generation capacity, 40 GWh/5 GW of energy storage by 2030, and 1 GW of solar module manufacturing by April 2025. This substantial growth targets a 22% CAGR in balance sheet size from FY 2023 to 2030, aligning with the goal of becoming carbon neutral by 2050. The company is already making significant strides toward its 10 GW capacity growth target ahead of the FY 2025 timeline, emphasizing renewables and innovative energy solutions.
Currently, JSW Energy is actively constructing 2,266 MW of wind projects, 240 MW of hydro projects, and 700 MW of thermal projects. The company has secured 3.4 GWh of energy storage capacity through pumped storage and battery energy storage systems, alongside partnerships for an additional 72 GWh in various states. These forward-looking projects are propelling the company toward a modernized presence across the renewable power supply chain.
Thermal Power Plants:
Vijayanagar
Capacity: 860 MW
PLF (Plant Load Factor): In FY 2023, it achieved an average actual PLF of 51% compared to 45% in FY 2022.
Total Gross Power Generated: 3,854 MUs
Net Power Generated: 3,550 MUs
Power Sales: Long-term sales to various companies under power purchase agreements (PPA) and short-term/merchant sales.
Key Strengths: Located in high-demand areas of South India, operationally strong plant with high fuel efficiency.
Ratnagiri
Capacity: 1,200 MW
PLF: In FY 2023, the plant operated at an average deemed PLF of 84% compared to 73% in FY 2022.
Total Gross Power Generated: 6,243 MUs
Net Power Generated: 5,714 MUs
Power Sales: Long-term sales to various consumers under PPA and short-term/merchant sales.
Key Strengths: Strategic location near Jaigad port for cost savings, high recovery, and robust ROE.
Barmer
Capacity: 1,080 MW
PLF: In FY 2023, the plant achieved an average deemed PLF of 80% compared to 81% in FY 2022.
Total Gross Power Generated: 7,286 MUs
Net Power Generated: 6,544 MUs
Power Sales: To Rajasthan DISCOMs
Key Strengths: Assured fuel availability, full cost recovery under long-term PPA.
Nandyal
Capacity: 18 MW
PLF: In FY 2023, the plant achieved an average deemed PLF of 98% compared to 99% in FY 2022.
Key Strengths: 100% LT PPA under Group Captive scheme (18 MW).
Ind-Barath
Capacity: 700 MW
Status: Under construction, expected commissioning in FY 2024.
Hydro Power Plants:
Baspa-II
Capacity: 300 MW
PLF: Achieved an average PLF of 51% for FY 2023.
Power Sales: To Himachal Pradesh State Electricity Board (HPSEB)
Key Strengths: 100% LT PPA with HPSEB ensuring full recovery of fixed cost.
Karcham Wangtoo
Capacity: 1,091 MW
PLF: Achieved an average PLF of 47% for FY 2023.
Power Sales: To DISCOMs through long-term PPA with PTC India Limited
Kutehr Hydroelectric Project
Capacity: 240 MW
Expected commissioning: September 2024
35-year PPA with Haryana Power Purchase Center.
Solar Power Plants:
225 MW Vijaynagar
25-year PPA with JSW Steel
Status: Completed, operations commenced in April 2022.
10 MW Solar Plant
Ground-based and rooftop solar power projects with captive power tie-up within JSW Group.
422 MW Mytrah Solar Plants
Located in Punjab, Telangana, and Karnataka.
Status: Operational, asset optimization and performance improvement plan in progress.
Wind Power:
733 MW Wind Plant
Signed 25-year PPA with JSW Steel
Located in Karnataka, Maharashtra, and Tamil Nadu.
Status: Under construction, expected commissioning progressively during FY 2024.
1,260 MW Wind Plants in Tamil Nadu
SECI IX (810 MW) and SECI X (450 MW)
Signed 25-year PPA with SECI
Status: Under construction, progressive commissioning started in Q3 FY 2023.
SECI XII (300 MW)
Signed 25-year PPA with SECI
Status: Under construction, expected commissioning in March 2025.
1,331 MW Mytrah Wind Plants
Located in Karnataka, Maharashtra, Tamil Nadu, Andhra Pradesh, Telangana, Madhya Pradesh, Gujarat, and Rajasthan.
Status: Operational, asset optimization and performance improvement plan in progress.
Storage Projects:
Battery Energy Storage System
Capacity: 1.0 GWh / 500 MW
Status: Received Letter of Award (LoA) from SECI, expected commissioning by Calendar year 2024.
Pumped Hydro Storage
Capacity: 2.4 GWh / (300 MW x 8hrs)
Status: Received Letter of Intent (LoIs) from Power Company of Karnataka Ltd, expected commissioning in 36 months from signing of PPA.
Electrons to Molecules:
Solar PV Module Manufacturing
Capacity: 1 GW/annum
Status: Allotted capacity under PLI scheme for Wafer-Cell-Module manufacturing, expected commissioning in April 2025.
Green Hydrogen
Contracted 3.8 KTPA of capacity for production of green hydrogen, expected commissioning in FY 2025 (18-24 months).
JSW Energy's forward-looking approach is exemplified by its subsidiary, JSW Neo Energy Limited, which focuses on emerging energy sectors such as hydro pumped storage, battery energy storage, green hydrogen, and energy products and services. This strategy demonstrates the company's adaptability to market trends and its commitment to leading the energy transition.
The company's business profile is diversified with presence in the fields of thermal, hydro, and renewable power generation, as well as involvement in transmission, trading, and mining activities. JSW Energy Limited has an extensive and robust operational footprint. As of September 30, 2022, the company holds an operational generation capacity of 4,784 MW, with thermal power contributing the majority at 66%, followed by hydro power at 29%, and renewable energy at 5%. Notably, approximately 85% of this operational capacity is secured through long-term Power Purchase Agreements (PPAs), ensuring a stable revenue stream and reducing exposure to offtake risks.Further, the cost-plus, regulated nature of tariffs for majority of the long-term PPAs tied up ensures stable cash flows and healthy profitability.
Power is one of the most critical components for infrastructure development and crucial for the economic growth and well-being of any country.
The power industry in India is categorized into three key segments:
Generation: This involves the production of electricity using various sources like thermal energy (coal, diesel, etc.), nuclear energy, and renewable sources such as sunlight and wind. These processes occur in power generation plants.
Transmission: Transmission utilities are responsible for efficiently transporting substantial quantities of electricity from power generation plants to distribution substations through a high-voltage grid.
Distribution: The distribution segment focuses on delivering electricity to end consumers at lower voltages through retail electricity distribution networks.
These three segments collectively form the backbone of the power industry, supporting India's continued economic growth and development.
India has witnessed significant growth in its installed power capacity over the years. From 356 GW in Fiscal 2019, it has surged to 416 GW in Fiscal 2023, with a good year-on-year increase of 5% recorded in July 2023, reaching a total capacity of 424 GW. This places India as the world's third-largest producer of power and the second-largest consumer of energy.
While conventional energy sources currently account for 58% of the total installed capacity, the Indian Government's ambitious initiatives and targets are set to reshape the energy landscape. Power generated from Renewable Energy Sources (RES), including hydroelectric power, presently constituting 42% of the capacity, is expected to rival conventional sources in the near future. With an unwavering focus on the renewable sector, the proportion of installed capacity is projected to shift significantly towards renewable energy sources. This shift reflects India's commitment to sustainable and clean energy solutions.
Coal (Thermal)
Coal (Thermal) India has the world’s fifth largest known coal reserves of 361,411 million tonnes as on April 2022, however, coal production has lagged behind demand. This has resulted in a dependence on imports. Coal is primarily provided by public-sector enterprises at prices specified under fuel supply agreements, and can be purchased through eauctions conducted by the public sector coal miners or procured from captive coal mines. India’s coal production has been on an increasing trend due to sustained investments and greater thrust on use of modern technologies. The all India coal production stood at 893 million tonnes in Fiscal 2023 and 293 million tonnes between April 2023 - July 2023, with a year-on-year growth of around 14.8% and 10%, respectively. The dispatch of coal to the power sector was at its peak of 91% during Fiscal 2020. Since then there has been a shift and decrease in the dispatch of coal to power sector.
Renewable Power
India's renewable energy capacity, including hydro power, has risen from 123 GW in Fiscal 2019 to 172 GW in Fiscal 2023, with a total potential of 1,639 GW. This growth is attributed to increased government support, improved economies, and heightened investor interest. India is committed to reducing its GDP emissions intensity by 45% by 2030 (compared to 2005 levels) and achieving a non-fossil fuel-based power capacity of around 500 GW by 2030, as proposed at COP26 in November 2021.
The Government of India (GoI) has prioritized areas like renewable component manufacturing, green energy corridors, green hydrogen production, utility-scale battery storage, pumped storage hydro, and rooftop solar power. With a target of 500 GW of renewable energy capacity installation by 2030 and a net-zero emissions goal by 2070, India is on an accelerated path towards a significant energy transition.
Solar:
In the last nine years, solar power capacity in India has experienced exponential growth, increasing from 4 GW in March 2015 to 71 GW in July 2023, supported by the Ministry of New and Renewable Energy (MNRE). Solar tariffs have become highly competitive, achieving grid parity. The sector has seen development in both large-scale grid-connected solar PV and off-grid solar projects for local needs. Government initiatives such as the National Solar Mission, Solar Park Scheme, VGF Schemes, CPSU Scheme, Canal and Canal Top Scheme, and Grid-Connected Solar Rooftop Scheme have propelled solar energy to become the fastest-growing renewable energy source in India. As of March 2023, 36.27 GW of solar projects are under construction according to the Central Electricity Authority.
Wind:
India has the fourth-largest wind power capacity in the world, with a total installed capacity of 44 GW as of July 2023. However, the pace of capacity additions in the wind sector has slowed down due to factors like the scarcity of favorable wind sites, a shift in policy from feed-in-tariffs to competitive bidding, and the removal of generation-based incentives and accelerated depreciation benefits. As of March 2023, 10.76 GW of wind projects are under construction, along with an additional 6.47 GW of hybrid projects.
Hydroelectric:
India ranks fifth globally in installed hydroelectric power capacity, with a total utility-scale hydro capacity of 47 GW in July 2023, constituting 11% of the country's total utility power generating capacity. Approximately 10.9 GW of hydro projects are under construction, with expected completion between Fiscal 2024 and Fiscal 2027.
For small hydro power projects (capacity up to 25 MW), the MNRE oversees their construction. As of July 2023, the total installed capacity for small hydro projects is 4,982 MW, with an additional 277 MW under construction.
Bioenergy
Bioenergy and waste-to-energy projects hold substantial potential, particularly in rural areas lacking grid access. As of July 2023, the total power generating capacity from bioenergy is 10,818 MW. Gasification-based bioenergy projects with an aggregate capacity of 59.25 MW are under construction, along with 227.25 MW of waste-to-energy and co-generation projects.
|
Name |
Position |
Education |
Experience |
|
Mr. Sajjan Jindal |
Chairman and Managing Director |
Graduated as a mechanical engineer in 1982 |
Joined the OP Jindal Group in 1982 and moved to Mumbai in 1983. Promoted various companies for integration. |
|
Mr. Parth Jindal |
Non-Executive, Non-Independent Director |
MBA from Harvard Business School in 2016 |
Joined JSW Group as an economic analyst in 2012. Appointed as managing director of JSW Cement in 2014. |
|
Mr. Prashant Jain |
Joint Managing Director and CEO |
Mechanical engineer with over 30 years of experience |
Has extensive experience in various areas such as Operations, Project Execution, and Corporate Strategy. |
|
Mr. Pritesh Vinay |
Director (Finance) |
B.E. (Computer Science & Engineering), MMS (Finance) |
Holds 22 years of experience in Corporate Finance, Fund Raising, Investor Relations, and Equity Resea |
The company is trading at a premium to industry peers like NTPC Ltd, Tata Power Company Ltd, Adani Power.
Most of the growth that will materialize in the future has already been priced in the stock as the company is trading at a higher valuation (P/E) to it’s listed peers and company’s long term average, any mismatch between the delivery of the ongoing projects can significantly affect the cash flow and in turn earning multiple.
Major Risk in the Business
Private Sector Entry in Thermal Power under Electricity Act 2003:
The Electricity Act 2003 played a pivotal role in facilitating the entry of the private sector into thermal power production by eliminating the need for a license to produce thermal power. This move opened the doors for private entities to invest and participate in the thermal power generation sector.
Regulatory Support for Debt in Thermal Power Projects:
Given the capital-intensive nature of thermal power plants, regulators have recognized the need for substantial debt financing. Consequently, they have permitted a debt-to-equity ratio of 2.33, or a debt and equity contribution of 70:30, for thermal power projects. This approach aims to ensure that these projects have access to the necessary financial resources for their development.
Government Support for Discoms and its Impact on Power Generation Companies:
The government extends support to power generation companies by assisting financially distressed distribution companies (discoms). Since discoms are the primary customers of power producers, the financial health of discoms significantly affects power generators. However, financially stressed discoms often delay payments to power producers, leading to adverse consequences for their financial stability.
Introducing the UDAY Scheme in 2015:
To address the financial challenges faced by discoms, the government introduced the Ujwal DISCOM Assurance Yojana (UDAY) scheme in 2015. Under this initiative, state governments took over 75% of the debt burden of distribution companies, providing them with much-needed relief and financial stability.
Challenges in Long-Term Power Purchase Agreements (PPAs):
Securing long-term power purchase agreements (PPAs) has become increasingly challenging for power plants. Many plants are compelled to rely on medium and short-term PPAs, which do not cover the entire duration of debt repayments. This exposes them to the risk of adverse impacts on power tariffs upon renewal, especially if their current tariff rates are higher than market prices.
Competitive Bidding and Margin Pressure:
Even for those power plants that secure long-term PPAs, they must bid competitively to acquire them. This fierce competition results in lower profit margins. As mentioned earlier, discoms are mandated to purchase power through competitive bids rather than cost-plus tariff agreements, intensifying market competition.
Impact of Power Exchanges and Increased Competition:
The emergence of power exchanges, both in domestic and global markets, has introduced new players, known as power traders. These traders purchase electricity from power exchanges and supply it to customers, intensifying competition in the power generation sector. This competitive landscape can lead to suboptimal operations and even shutdowns of thermal power plants.
Challenges in Land Acquisition and Regulatory Approvals:
Constructing a thermal power plant requires a substantial parcel of land, which presents challenges in terms of land acquisition. Additionally, obtaining various approvals, such as environmental clearances, is a time-consuming process that carries the risk of project delays and cost escalations.
Operating and Maintenance (O&M) Contracts:
Power plants typically engage operating and maintenance (O&M) agencies to ensure the smooth day-to-day operations and maintenance of thermal power plants. O&M contracts include provisions that mandate optimal plant performance and stipulate penalties for suboptimal operation.
Advantages of Captive Coal Mines:
Thermal power plants with captive coal mines enjoy the advantage of assured coal supply, which shields them from the fluctuations in coal prices, ensuring a more stable and predictable operating environment.
Capital-Intensive Nature and Long Gestation Period:
The capital requirements for thermal power plants, including initial construction and ongoing maintenance, make it a capital-intensive business. As a result, thermal power plants have a long gestation period of 3 to 4 years before they can begin commercial operations.
Regulatory Hurdles and Socio-Political Issues:
The regulatory landscape adds significant barriers to entry for new thermal power producers. Land acquisition, compensation payments, environmental concerns, and local issues such as air pollution and water depletion can pose obstacles to the establishment of new thermal power plants.
Emission Norms and Compliance:
Environmental regulations have mandated the installation of Flue Gas Desulphurization (FGD) systems in thermal power plants located near cities to reduce emissions. This regulatory requirement has forced power plants to invest in emission control technologies to meet compliance standards.
Land Requirements and Debt Financing for Solar Power:
Solar power plants demand relatively large land parcels compared to thermal power plants. Additionally, due to their capital-intensive nature, solar power projects typically rely on a debt-to-equity ratio of 3:1 for funding.
Government Support for Solar Power:
The Indian government supports renewable power production, including solar power, through the imposition of a renewable purchase obligation (RPO) on distribution companies. This obligation mandates that distribution companies purchase the renewable power produced, creating a situation where every unit of solar power generated should find a buyer.
Land Intensity and Seasonal Variability in Wind Power:
Wind power projects have significant land requirements, often far surpassing those of other power generation methods like thermal and solar. The necessity for minimum spacing between wind turbines, due to wake effects, increases land usage.
Seasonal Production Variability in Wind Power:
Wind power production exhibits pronounced seasonal fluctuations, with peak generation occurring during monsoon months and declining in other seasons. These seasonal variations are more pronounced in wind power generation compared to other forms of power, including solar.
Debt Services Reserve Account (DSRA) for Wind Power Plants:
To account for the seasonal variability in wind power generation, wind power plants typically maintain an extra reserve equivalent to 3 to 6 months of debt repayment, known as the Debt Services Reserve Account (DSRA).
I/we have no positions in any stocks mentioned, but may initiate a position.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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