Citi on JSW Energy

JSW Energy Ltd
(JSWE.BO; Rs122.65; 2L)
Valuation
Traditional valuation methodologies like P/E and EV/EBITDA multiples can be
misleading if used to value pure infrastructure asset holders, as profitability of
the projects can be lumpy, primarily on the basis of year of commissioning and
the life of the asset. Infrastructure assets and more specifically Electric Utilities
generate regular and largely predictable cash flow streams for a fixed time
period. Therefore, the discounted cash flow (DCF) approach is the best-suited
tool to value them.
While applying the DCF one can either choose the free cash flow to the firm
(FCF) or the free cash flow to equity (FCFE). We prefer FCFE as individual
projects are highly geared and gearing changes as debt is rapidly paid off. We
value JSWEL’s power projects using DCF on FCFE and cost of equity of 13% for
all projects to get a target price of Rs135.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Low Risk rating to JSWEL. We believe a Low Risk rating is
appropriate based on a number of factors, namely the status of projects under
implementation, execution track record, industry-specific risks, fuel supply
status, financial risk and management risk.