JM Financial: JSW Energy Maintain BUY with a TP of `135 (Mar’11)E

Concerns unwarranted
􀂄 Decline in spot tariffs…: Spot tariffs have declined significantly in the
September quarter (down 41% YoY, 39% QoQ) as volume in the short-term
market increased by over 100% as compared to 2Q09 and demand declined
3.2% in Sep’10 compared with last year.
􀂄 …however 3-6 months bilateral PPA limit downside for JSW: JSW has
entered into short-term contracts (3-6 months) for sale of its merchant power,
averaging FY11 realisations between `5.0-5.2/kWh vs. the current rate of
`3.3/unit (IEX). We believe these contracts will not only restrict the short-term
volatility of realization, but also enable JSW to have the capacity open for
merchant sale in the peak season next year (1Q12).
􀂄 PPA with Karnataka for 600MW at `3.81/unit: JSW has contracted 600MW
from Vijaynagar plant (2X300MW) to Karnataka State Electricity Board (under
case-I bidding) at a levelised tariff of `3.81/unit beginning Mar’14. For 2010-
13, JSW plans to sell power from the plant in merchant market.
􀂄 Steady and improving coal linkage: JSW will be benefitting from its contract
for South African coal at $85 vs 1HFY11 average of c.$90. In addition,
50,000mtpa coal supply from Indonesia commenced this quarter. Further,
mining activity has started in SACMH controlled South African coal mines and
the first shipment is expected next month. Based on our estimates, JSW has
arranged fuel linkages for c.30% of its coal requirement in FY12 (11.4mtpa).
􀂄 Projects commissioning as per schedule: Based on our discussions with the
management, Barmer-II (135 MW) has commissioned on 4th October and
Ratnagiri (3X300MW) is on schedule for Nov’10, Jan’11 and Mar’11
commissioning (BLH and steam blowing underway). Barmer unit-I has
restarted with a PLF between 80-85%.
􀂄 Maintain BUY with a TP of `135 (Mar’11)E