India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Energy
Peeling back earnings on rising coal
Event
�� Macquarie has increased its thermal benchmark coal price forecasts in FY12
by 38% from US$105/t to US$145/t and in FY13 by 20% from US$100/t to
US$120/t. Our thermal coal price upgrade reduces our FY12 and FY13 EPS
for JSW Energy by 17% and 13% respectively and lowers our price target by
7% to Rs.93/share.
�� We have previously highlighted that JSW Energy is a trading stock, given its
commodity price leverage. The market is clearly bearish on merchant power
prices, where we see a seasonal imporvement over the next six months, so
the stock is becoming increasingly interesting. However, rising coal prices and
merchant power prices weakness will again deliver a disappointing set of
quarterly results in 3Q11 which further threatens its 8x FY12 PER, so we don’t
recommend investors to buy the stock at these prices at this time.
Impact
�� Thermal coal price forecast up 38% and 20% in FY12 and FY13: to
US$138/t and US$120/t respectively. Risks to pricing in the short term are
skewed to the upside, given the severe problems with supply, while we feel
comfortable that Indian demand will continue to rise, while the fundamentals
of the Chinese market could turn positive very quickly heading into mid-2011.
�� JSWE EPS forecast falls 17% and 13% in FY12 and FY13: due to our rising
coal price forecasts. We estimate JSW Energy will require 3.2mtpa of
imported coal from the spot market in FY12 and 3.4mt in FY13. This is driven
by the fuel requirements of its 860MW Vijayanagar Power Project and the
1,200MW Ratnagiri Power Project.
�� Merchant leverage increasing: JSW Energy has been the highest leverage
play on merchant power prices due to its high cost structure (using imported
coal). With fuel costs rising even further and merchant exposure remaining
high, leverage increases. A Rs.0.5/kWh change to merchant price assumption
would change FY12 earnings by ~30% and FY13 NPAT by ~45%.
Earnings and target price revision
�� Rising coal price forecasts have reduced EPS by 9% in FY11, 17% in FY12,
13% in FY13 and 4% in FY14. Our price target falls from Rs.101/share to
Rs,93/share.
Price catalyst
�� 12-month price target: Rs93.00 based on a DCF methodology.
�� Catalyst: the upcoming 3Q11 earnings over the next months are likely to
disappoint the market in our view.
Action and recommendation
�� Retain Neutral, with the stock trading in line with our price target of
Rs.93/share. Despite trading at on a 1yr fwd PER of 8x, we view short-term
earnings risk and consensus downgrades as high.
No comments:
Post a Comment