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JSW Energy
Coal burn in 3Q11
Event
There will most likely be FY11 downgrades across the street post this result.
While we knew that the company’s thirst for import coal would hurt earnings,
3Q11 EBITDA of Rs3.5bn (US$77m) still came in 30% below our estimate,
driven by higher than expected fuel costs (imported spot volumes). While
JSW Energy is the most exposed to a recovery in merchant power price
expectations due to its high leverage, we still think there is downside to the
stock price in the short-term with likely market downgrades to come through.
Sector takeaway - merchant power price realisation of Rs4.87/kWh was
higher than 2Q11 of Rs4.65/kWh and 3Q10 of Rs4.57/kWh. Rajwest didn’t get
any of its tapering linkage from CIL – linkages to increasingly disappoint.
Impact
Merchant price realisations strong…despite generation volumes being 10%
below our forecast, revenues were smack in-line, with average power price
realisations of Rs.4.43/kWh and merchant realisations of Rs.4.87/kWh.
…but fuel costs rocket…what surprised us was the higher amount of
imported coal purchased on the spot market vs. coal delivered from JSW
Energy’s low cost contract with Sungai Belati (Indonesia). Unit fuel costs were
Rs2.66/kWh and are likely to increase in 4Q11 as Ratnagiri benefited in 3Q
from coal stockpiles procured prior to the recent thermal coal prices rises.
…so FY11 NPAT consensus will likely have to come down: we further
bring our FY11 NPAT forecast down by 11% (previously 15% below market).
Consensus FY11 EBITDA is Rs22.5bn vs. 9 month actual EBITDA of
Rs11.3bn and FY11 NPAT is Rs12.4bn vs 9 month actual of Rs6.4bn.
New projects still have to prove themselves operationally: the company
noted that RajWest achieved a PLF of ~80% in December (vs. 3Q11 average
of 61%). Ratnagiri only achieved 73% PLF due to both stabilisation issues
and orders from the RLDC to back down generation. We need to see these
plants maintain at least 80%+ PLF over a quarter to get confident around our
longer-term assumptions.
Earnings and target price revision
We have reduced FY11 NPAT by 11% and FY12 by 5%.
Price catalyst
12-month price target: Rs89.00 based on a DCF methodology.
Catalyst: addition of third Ratnagiri Unit in March/April 2011.
Action and recommendation
In 4Q11 we expect the full contribution of Ratnagiri Unit 2 to improve overall
realisations for JSW Energy, with100% of the output exposed to merchant
and increased market confidence around merchant power pricing. In the short
term, however, we think that earnings downgrades continue to threaten JSW
Energy’s seemingly reasonable 9x FY12E PER (vs. sector at 12x).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Energy
Coal burn in 3Q11
Event
There will most likely be FY11 downgrades across the street post this result.
While we knew that the company’s thirst for import coal would hurt earnings,
3Q11 EBITDA of Rs3.5bn (US$77m) still came in 30% below our estimate,
driven by higher than expected fuel costs (imported spot volumes). While
JSW Energy is the most exposed to a recovery in merchant power price
expectations due to its high leverage, we still think there is downside to the
stock price in the short-term with likely market downgrades to come through.
Sector takeaway - merchant power price realisation of Rs4.87/kWh was
higher than 2Q11 of Rs4.65/kWh and 3Q10 of Rs4.57/kWh. Rajwest didn’t get
any of its tapering linkage from CIL – linkages to increasingly disappoint.
Impact
Merchant price realisations strong…despite generation volumes being 10%
below our forecast, revenues were smack in-line, with average power price
realisations of Rs.4.43/kWh and merchant realisations of Rs.4.87/kWh.
…but fuel costs rocket…what surprised us was the higher amount of
imported coal purchased on the spot market vs. coal delivered from JSW
Energy’s low cost contract with Sungai Belati (Indonesia). Unit fuel costs were
Rs2.66/kWh and are likely to increase in 4Q11 as Ratnagiri benefited in 3Q
from coal stockpiles procured prior to the recent thermal coal prices rises.
…so FY11 NPAT consensus will likely have to come down: we further
bring our FY11 NPAT forecast down by 11% (previously 15% below market).
Consensus FY11 EBITDA is Rs22.5bn vs. 9 month actual EBITDA of
Rs11.3bn and FY11 NPAT is Rs12.4bn vs 9 month actual of Rs6.4bn.
New projects still have to prove themselves operationally: the company
noted that RajWest achieved a PLF of ~80% in December (vs. 3Q11 average
of 61%). Ratnagiri only achieved 73% PLF due to both stabilisation issues
and orders from the RLDC to back down generation. We need to see these
plants maintain at least 80%+ PLF over a quarter to get confident around our
longer-term assumptions.
Earnings and target price revision
We have reduced FY11 NPAT by 11% and FY12 by 5%.
Price catalyst
12-month price target: Rs89.00 based on a DCF methodology.
Catalyst: addition of third Ratnagiri Unit in March/April 2011.
Action and recommendation
In 4Q11 we expect the full contribution of Ratnagiri Unit 2 to improve overall
realisations for JSW Energy, with100% of the output exposed to merchant
and increased market confidence around merchant power pricing. In the short
term, however, we think that earnings downgrades continue to threaten JSW
Energy’s seemingly reasonable 9x FY12E PER (vs. sector at 12x).
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