JSW Energy- 2Q disappoints on multiple counts; JPMorgan

Visit http://indiaer.blogspot.com/ for complete details �� ��


JSW Energy Ltd. Neutral
JSWE.BO, JSW IN
2Q disappoints on multiple counts; pipeline grows



• 2Q well below expectations. Reported PAT of Rs.1.8B was below our est.
of Rs.2.2B, significantly disappointing street est. of Rs.2.5B on the back of:
1) a loss making unit at Barmer (Rs.0.6B loss in 1H) riddled with
operational hiccups. The long drawn gestation period has resulted in a 22%
increase in project cost to Rs60.8B. 2) higher than expected fuel cost
(Rs.2.6/unit vs. Rs2.3/unit in 1Q) and 3) lower merchant rate. 2Q PAT was
supported by Rs738M of project management income from JSW Steel.



• Production declines. Overall net generation declined by 2.5% qoq despite
the commissioning of the first 300MW unit at Ratnagiri due to: 1) an
anticipated reduced PLF (91% vs. 98% in 1Q) at Vijaynagar (860MW) due
to maintenance 2) lower than est. PLF at Barmer (~20% vs. 42% in 1Q) due
to water shortages and major repairs in our view and 3) a modest 63% at
Ratnagiri due to teething problems post commissioning. However mgmt.
has indicated that the Barmer plant is now operating at 100% PLF.

• Open fuel sourcing remains the key risk. In 2Q, the gross margin (tariff –
fuel cost) at the standalone level (Vijaynagar + Ratnagiri) almost halved to
Rs1.6/unit due to increases in fuel costs (+6.2% qoq), PPA based tariff for
Ratnagiri (est. Rs3.8/unit) and lower merchant price. Hence given the lack
of fuel cost pass thru, the volatility in coal costs remains the key risk to near
term earnings. On the tariff front, we expect some stability going forward
since JSW has entered into a bilateral agreement to sell power from V-II
(600MW) at >Rs5/unit through May-11 to SEBs starting Oct-10.

• 660MW added to the pipeline. JSW plans to commission a 660MW
supercritical unit at its Vijaynagar site in the next 42 months at a cost of
Rs.50mn/MW. The plant will run on imported coal; however the company
has applied for domestic linkage as well. At 1x book, the expansion could
potentially add Rs6/share to valuation.

• Work still to be done on the back ended pipeline. We est. JSW to ramp up
capacity to 3.14GW by FY13 from 1.43GW currently and expect the West
Bengal project to come online FY15 onwards. Although we value the entire
project (Rs21/share) mgmt. is still seeking approvals for Phase I of 660MW.
We don't assign value to the 1.32GW Chattisgarh project (still awaiting
MOEF clearance, completion of land acquisition and financial closure) and
the 3.2GW Ratnagiri II project (land acquisition in progress), both of which
are still to clear key pre-construction hurdles. Mgmt. is also still awaiting
approval for the Phase II expansion (2X135MW) at Barmer.