Green Energy Expansion Powers Future Growth And Profitability Potential

Key Takeaways

• Increasing renewable energy capacity and energy storage projects likely to drive JSW Energy's revenue growth and improve operational efficiency.
  
• Diversification into green hydrogen and ensuring efficient cost management offer promising new revenue streams and potential for attractive shareholder returns.
  
• JSW Energy faces potential revenue and profitability challenges due to declining power demand growth, lower tariffs, rising debt, and regulatory impacts.

Catalysts

Generates and sells power in India.

• The focus on increasing renewable energy capacity, including significant solar and wind power installations, is likely to drive future revenue growth as demand for clean energy increases.
  
• The ongoing development of energy storage projects, such as the Bhavali hydro pump project and Asia's largest battery energy storage system, is expected to enhance operational efficiency and could improve JSW Energy's net margins over time.
  
• Diversification into green hydrogen and oxygen production offers new revenue streams and the potential for higher-margin products as demand for clean hydrogen increases in industrial applications.
  
• Recent PPAs for renewable projects indicate stable future cash flows and revenue, while the strategic focus on both traditional and emerging energy solutions positions the company to potentially increase earnings over the next few years.
  
• Efficient management of cost structures in competitive bid projects, ensuring a mid-teen levered equity IRR, could lead to enhanced earnings and attractive return on equity for shareholders.

JSW Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming JSW Energy's revenue will grow by 24.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.1% today to 19.0% in 3 years time.
• Analysts expect earnings to reach ₹41.9 billion (and earnings per share of ₹21.58) by about November 2027, up from ₹19.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹28.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.2x on those 2027 earnings, down from 65.9x today. This future PE is greater than the current PE for the IN Renewable Energy industry at 23.3x.
• Analysts expect the number of shares outstanding to grow by 3.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

JSW Energy Future Earnings Per Share Growth

Risks

• The decrease in the total power demand growth (only 1% in a quarter compared to the previous year) and a decline in thermal plant PLF from 66.7% to 64.8% could impact future revenue and profit growth for the power sector and JSW Energy.
  
• The reduction in day-ahead market prices (from ₹5.90 to ₹4.50) and lower merchant market tariffs could negatively affect revenue and margins from short-term power sales.
  
• A reported decline in the two-part tariff for the Karcham Wangtoo hydro power plant due to a regulatory change in depreciation rates after 12 years can result in reduced tariffs and EBITDA, impacting overall earnings.
  
• Although net generation increased by 14%, revenue only rose by 2% year-on-year, mainly due to tariff reductions and a decline in EBITDA, suggesting potential challenges to revenue growth and profitability.
  
• Increasing net debt (up by ₹1,500 crores sequentially) and reliance on project completion to alleviate financial leverage could pose risks to financial stability, potentially affecting earnings and margins if project timelines are not met.

Valuation

• The analysts have a consensus price target of ₹692.0 for JSW Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹900.0, and the most bearish reporting a price target of just ₹330.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹221.0 billion, earnings will come to ₹41.9 billion, and it would be trading on a PE ratio of 45.2x, assuming you use a discount rate of 12.2%.
  
• Given the current share price of ₹739.05, the analyst's price target of ₹692.0 is 6.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.