JSW Energy:: a cyclical utility:: Daiwa

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JSW Energy: Initiation of coverage: a cyclical utility
We expect strong merchant-capacity additions
􀂃 We initiate coverage of JSWE with a 2 (Outperform) and a DCFbased
six-month target price of Rs141. JSWE’s merchant capacity
potential, based on company guidance, is among the highest in the
sector at 1,460MW for FY11 and 1,760MW for FY12. The recent
sharp fall in merchant rates should not affect its ASPs, as it has
bilateral contracts at upwards of Rs5/Kwh until May 2011.
Concerns on imported coal dependence seem overdone
􀂃 Almost two-thirds of JSWE’s capacity is based on imported
coal. With coal from the Sungai Belati linkage and the South
African Coal Mining Holdings Ltd (SACMH) acquisition, we
estimate 85% of its capacity is secured for FY11 and 70% for
FY12. Its dependence on spot coal in FY11 should only be
0.41m tonnes, and from FY12 onwards it should be at 1.74m
tonnes, based on our forecasts. An increase of US$10/tonne in
imported coal costs would result in our FY11 and FY12 earnings
forecasts declining by only 3% and 4%, respectively.
􀂃 We believe the costs of JSWE’s fuel procurement are high
currently but are offset by the high merchant tariffs, as JSWE
does not have capped tariffs in its PPAs.
We forecast an earnings CAGR of 79% for FY10-12
􀂃 We forecast JSWE’s earnings to rise at a CAGR of 79% for
FY10-12, with its net profit rising from Rs7.5bn for FY10 to
Rs15.1bn for FY11, and to Rs23.9bn for FY12.