• Execution hurdles continue at Barmer (8X135MW): JSW expects to
commission six units in FY11 (our estimate is four units) and the other
two in FY12, as opposed to the full 1,080MW in FY11 as previously. The
second unit came online in Oct-10, lagging Unit 1 by ~3Qs indicating
execution difficulties due to water shortages and weather conditions.
Increased O&M expenses and a reduced PLF will translate into an underrecovery
of fixed charges (sub 80% PLF), in our view. We estimate ROE
of 1-13% through FY13, and this reduces our SOP by ~Rs.5.4/share.
• 2Q likely to be weak: MoP’s generation data show PLFs at Barmer
(~30% vs 42% in 1Q) and VI&II (~88% vs. 98% in 1Q) were low on
account of maintenance-related outages. We think Barmer’s Unit 1
operating for <1 year would have had more serious repair issues. We
estimate PAT of Rs2.2B, down 27% QoQ, despite an additional 300MW
unit operating for one month.
• 600MW of capacity tied at >Rs5/unit: JSW has entered into a bilateral
agreement to sell power from Vijaynagar-II at >Rs5/unit through May-11
to SEBs, starting Oct-10. Previously the plant was to sell 300MW to JSW
Steel at PPA rates (Rs3/unit) through FY11. Now 100% capacity will be
sold as merchant power with JSW Steel setting up its own captive plant.
An eight-month bilateral agreement at this rate is positive for JSW, in our
view, and provides an intermittent hedge for high fuel costs (Rs2.25/unit
in 1Q for VI&II) owing to 100% spot purchases from South Africa. We
increase merchant estimate for VI&II (860MW) to Rs5.5/unit (up Rs1)
and to Rs4.5/unit (up Rs0.5) in FY11 and FY12 respectively.
• Our Sep-11 PT of Rs116 (down from Rs128) includes Rs85 from
3.14GW of operational and under-construction projects and Rs21 from
pipeline projects. At 7.3x FY12E EV/EBITDA, JSW is at a discount to
other Indian IPPs (9-13x). Key downside risks: (1) slow development of
the Ichhapur mine (at exploratory stage) for the 1.6GW Salboni project
(CoD FY15, 17.5% of PT); (2) lower merchant rates with (46% of FY13
capacity); and (3) expensive spot coal purchases from South Africa. A key
upside risk is a coal mine acquisition guaranteeing fuel security.
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