Recommendation from Power Generation/Distribution Sector

This column gives you a scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year 

JSW ENERGY: POWERING UP THE PROFITS

HERE IS WHY
✓ India’s electricity demand to increase substantially
✓ Leadership position in power generation and distribution
✓ Impressive increase in net profit

P ower is among the most critical components of infrastructure, crucial for the economic growth and welfare of nations. Given that, the existence and development of adequate power infrastructure is essential for sustained growth of the Indian economy. India is the third-largest producer and consumer of electricity worldwide, with an installed power capacity of 423.35 GW as of July 31, 2023. Power generation in India increased by 8.87 per cent to 1,624.15 billion kilowatt-hours (kWh) in FY23. Electricity demand in the country has increased rapidly and is expected to rise further in the years to come. 

In order to meet the increasing demand for electricity in the country, massive addition to the installed generating capacity is required. Keeping in mind the importance of electricity, our choice scrip for this issue is JSW Energy Limited. The company is amongst India’s leading independent power producers and is a part of the USD 23 billion JSW Group. The company sells power through a combination of long-term and short-term power purchase arrangements and through the powerexchanges in India to state-owned utilities, power trading companies and some industrial consumers. 

JSW Energy has diversified sources of power generation that range from thermal to renewable sources such as hydro, wind and solar. Currently it has total thermal capacity of 3,858 MW out of which 3,158 MW is operational and 700 MW is under construction. It has renewable capacity of 5,934 MW out of which 3,613 MW is operational and 2,321 MW is under construction, which is expected to be operational by FY24.

In the renewable space, its wind projects consist of 61 per cent, hydro projects comprise 27 per cent and solar projects make up 11 per cent. India’s growing need for energy has led the company to quickly add to its renewable energy sources and aggressively expand the portfolio. This strategy is prompting the company use energy more wisely, save money and reach new customers. To meet India’s 500 GW renewable energy target and tackle the annual issue of coal demand supply mismatch, the Ministry of Power has identified 81 thermal units which will replace coal with renewable energy generation by 2026.

This spells huge potential for the company. In Q2FY24, on a consolidated basis its revenue rose by 36.52 per cent YoY to ₹3,259.42 crore compared to ₹2,387.48 crore from the previous year’s same quarter. On a sequential basis, its revenue increased by 11.32 per cent. For Q2FY24, the PBIDT excluding other income increased significantly by 111.38 per cent and stands at ₹1,880.38 crore from ₹889.58 crore in the previous year’s same quarter, while sequentially it increased by 53.87 per cent.

Net profit increased by 88.40 per cent and stood at ₹850.87 crore compared to ₹451.63 crore in the previous year’s same quarter, while sequentially it increased by 195.21 per cent from ₹288.23 crore. The company is currently trading at a PE of 43.5 times as against the industry PE of 24.8 times. In the last three years the company has delivered average ROE of 8.01 per cent and ROCE of 9.41 per cent, respectively. Considering the company’s business and its leading position in the power generation and distribution sector, we recommend BUY.