JSW Energy -SELL -Fuel cost takes a toll:: ICICI Sec

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JSW Energy (JSWEL) reported Q2FY10 numbers below expectations, with PAT at
Rs1.84bn (I-Sec: Rs 1.95bn; consensus: Rs2.47bn) primarily led by higher fuel cost
at Rs2.6/KwHR (I-Sec: Rs2.34/KwHR) and continuing issues at Barmer. Adjusting
for project management income on group companies, power project (one-time)
PAT stood at Rs1.47bn, 40% below the Street’s consensus for Q2FY11. We trim our
FY11-13E earnings 2-4%, consequently reducing our target price to Rs105/share
from Rs107/share. The management guides for FY11 merchant realisation at Rs4.8-
5.2/KwHR despite a weak environment as it has signed merchant power contract
till May ‘11. We maintain SELL on the back of JSWEL’s: 1) highest merchant
exposure in the sector, in line with our negative sectoral view on merchant power;
and 2) high exposure to international coal prices in a non-pass-through regime; the
current quarter negative cost surprise validates our concern. Our DCF valuation
suggests a downside of 8% from current levels.


􀁦 Disappointing quarter on fuel cost and weak merchant realisation. JSWEL
reported a weak quarterly performance primarily owing to higher fuel cost per unit and
lower merchant realisation. We are not reducing our estimates significantly, as we are
factoring in full-year management realisation guidance and reducing fuel cost going
forward. Further, one-time profit related to a group company project management
work of Rs370mn supported the bottom line.

􀁦 Barmer continues to be a concern. Barmer project reported a PLF of 27% primarily
owing to major repair at the facility. The management claims that Unit I and II have
stabilised now. The project cost increased a whopping 20% to Rs60.8bn from
Rs50bn, primarily owing to delays and rise in unit cost. Commencement of lignite coal
mine is very critical (expected in March ‘11) as the project is currently dependent on
imported fuel.
􀁦 Lack of positive surprise on execution front. Compared to initial project time lines,
project execution so far has been lagging, though marginally, except Barmer which is
facing significant delay of seven-eight months.
􀁦 Reduce target price, SELL stays. JSWEL has underperformed Sensex ~21% in the
past three months. Maintain SELL with target price of Rs105/share.