Why JSW Energy’s equity dilution move at the parent level makes sense

The company had the option of either raising funds in the parent company or in JSW Neo Energy, a wholly owned subsidiary having green energy generation projects.

The equity dilution at the parent level has its own advantages. The holding structure remains simplified and the possibility of holding company discount is eliminated. 

Also Read: Sajjan Jindal-owned JSW Energy to raise ₹5,000 crore via QIP; Details here

In future, the probable listing of the subsidiary would have meant that investors would have directly bought into it leading to reduced appetite and lower valuation for the shares of the parent company. 

The market has also cheered the company’s move as the share price rose to touch a 52-week high of ₹604 apiece on 4 April from ₹542 before the announcement on 2 April.

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Another reason for the equity raising at the parent level could be due to the possible expansion of thermal power capacity. Naturally, this is unlikely to be housed in JSW Neo Energy given its positioning as a green energy vehicle. Thus, the funds will be useful for fossil fuel-based expansion at the parent company.

The fund raise was anticipated as the company’s consolidated net debt of ₹26,286 crore as on December 2023 was more than 4x of its annualized Ebitda (earnings before interest, taxes, depreciation and amortization) for FY24 of nearly ₹6,000 crore based on the performance of the nine months ended December 2023. The proposed fund raise would bring it down to about 3.5x. Considering the aggressive capital expenditure plans of the company, the raising of equity funds is timely.

The only argument in favour of dilution at JSW Neo Energy would have been that the green energy generation companies are commanding higher valuation versus the fossil fuel-based energy generation companies. 

Even within public sector units, the green energy company i.e. NHPC is commanding enterprise value per megawatt (EV/MW) valuation of ₹17 crore based on FY23 capacity, which is almost thrice of NTPC at ₹5 crore. It would have meant raising funds with much lower equity dilution at JSW Neo Energy. But even this argument has little merit looking at the valuation of JSW Energy.

Despite not being a pure green energy company as JSW Neo Energy is just about 50% of the group, JSW Energy is already trading at a similar valuation to that of NHPC, 100% green energy company in terms of EV/MW. The premium in valuation could be because of the company’s robust growth track record. The premium valuation is all the more reason for raising funds at the parent company level.

Going forward, JSW Energy is targeting almost 10,000 MW or 10 GW of capacity by 2024-end with most of the incremental capacity addition in green energy generation. While it augurs well for the long term, it is all about capitalizing on the peak power shortage during the short term.

According to a JM Financial report, peak power deficit rose to 8,700 MW in FY23 as against 2,500 MW in FY22. Consequently, merchant power rates rose to ₹5.9 per unit from ₹4.4 during the same period. 

JSW Energy has taken a conscious decision of not entering into power purchase agreement (PPA) for the thermal power capacity of 1,300 MW, which enables selling electricity in the open markets.

While all the noise around the fund-raising exercise and expansion is positive, investors should also watch out for valuation. Antique Stock Broking projects an annual Ebitda of ₹900 crore per 1 GW, the potential Ebidta could be ₹9,000 crore for 10 GW. Even after that, the stock trades at a P/E of close to 30x based on FY26E of Antique estimates with fully diluted equity base post the QIP (assuming the dilution at floor price of ₹510). This may not be very attractive to buy into.