'Buy' JSW Energy — O2 Power Acquisition Unlocks Value, Says Motilal Oswal; Sees 29% Upside

Motilal Oswal Report

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JSW Energy Ltd. announced a definitive agreement to acquire O2 Power Midco Holdings Pte. Ltd., O2 Energy SG Pte. Ltd., and their subsidiaries (O2 Power) for a total cash consideration of Rs 124.68 billion. We view this move positively, and following are the key implications according to us:

Up to Rs 57/share value unlocking upon deal completion: With listed Renewable Energy generation companies currently trading at ~15 times EV/Ebitda, the acquisition of 4.7 GW high-quality renewable assets at ~seven times EV/Ebitda unlocks ~Rs 57 in value, we estimate.

High-quality assets: We like the overall quality of assets. Key highlights include:

1. interest cost for O2 Power at 8.8% is competitive and at par with JSW Energy itself;

2. receivable days at 43 for the asset portfolio are in fact lower than JSWE’s receivable days at 68 (FY24);

3. 87% of the portfolio is backed by utilities such as SECI/NTPC/SJVN, while the 13% C&I portfolio largely comprises AA or higher rated issuers;

4. we like the diverse nature of the asset portfolio encompassing solar, wind, and niche segments such as FDRE.

High transmission and land visibility:

O2 Power has full transmission connectivity for its entire 4.7GW portfolio, and the entire under-construction pipeline is backed by Power Purchase Agreements. We believe this is crucial in providing confidence to the market about the timely execution of the project pipeline.

Savings from in-house EPC/O&M:

Lastly, while the steady-state Ebitda from the 4.7GW portfolio is guided at Rs 37.5 billion, we believe there is potential for further upside due to JSW Energy carrying out the EPC/O&M of assets in-house.

Transitory rise in leverage: Should both the KSK Mahanadi and O2 Power deals be consummated by the end of FY25, we estimate JSW Energy’s net debt/Ebitda for FY26 to rise to 5.4 times (current estimate: 4.7 times). However, given the strong operating cash flow generation and the company’s ability to raise funds, we believe the transitory rise in leverage should not be a major concern.

We have a buy rating on JSW Energy with an SOTP-based target price of Rs 810/share.

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