JSW Energy- Sandwiched, with little help from Mmama:: Macquarie

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


JSW Energy
Sandwiched, with little help from Mmama

Event
􀂃 With the stock falling below our price target on Friday, we upgrade JSW
Energy from Underperform to Neutral. The stock has fallen 27% since mid
September and has underperformed the Nifty by 25%. Trading close to 7x
FY12E NPAT and 11x FY13E NPAT, would we recommend accumulating the
stock? Not yet – we remain cautious.


􀂃 Earnings are still being ‘sandwiched’ between rising thermal coal prices, softer
merchant realisations and a softening rupee, which further threatens earnings
estimates for FY11 and FY12 (spot prices would see a 40% decline in our
forecast FY12 NPAT). If we strip out growth from our NPV valuation, it falls to
Rs84/share, also implying further downside risk in a risk-averse market.

Impact
􀂃 CIC Energy acquisition – longer term potential: last week JSW Energy
entered into a binding agreement to acquire all the shares in CIC Energy for
C$7.42/share (US$414m in total). CICI owns the 2.6bnt Mmamabula coal
resource in land-locked south-eastern Botswana. From speaking with our
industry contacts in South Africa, the Mmamabula coal project, with a sizeable
2.6bnt resource (900mt of export quality at 5,500kcal/kg, 17-18% ash, 0.8%
sulfur) is highly dependant on infrastructure and long-term pricing.

􀂃 Export infrastructure to take 5.5-6.0yrs: the project aims to export 25mtpa,
although no coal is likely to be shipped for six years due to the requirement to
build a 1,500km railway line through Botwsana and Namibia to Walvis Bay,
which CIC itself is bidding for in consortium (potential need for capital). The
long duration of the project doesn’t help the short-coal position of JSW Energy
in the medium term.

􀂃 Power earnings from Mmamabula in FY14/15: A 300MW power plant is
expected to start construction mid next year, which should be up and running
within 3.5yrs, with power off-take contracts deriving an 18-20% ROE.

􀂃 JSW Energy remains highly leveraged: to merchant power prices, thermal
coal prices and currency. If we put spot merchant prices, coal prices and
currency through our model, our FY12 NPAT forecast would fall by 40%.

Earnings and target price revision
􀂃 No change to earnings estimates. Target price lowered to Rs101 from Rs105.

Price catalyst
􀂃 12-month price target: Rs101.00 based on a DCF methodology.
􀂃 Catalyst: execution over the quarter at Ratnagiri and 3Q11 to derive merchant
power price realisations and delivered costs from higher cost coal.

Action and recommendation
􀂃 Upgrade to Neutral based on poor stock performance.