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Sell JSW Energy: Downgrade earnings:: CLSA research
We are cutting FY11-13 earnings for JSW Energy by 17-40% to factor in
higher thermal coal prices and delayed commissioning of Ratnagiri and
Barmer power projects. With limited control on its coal supplies and large
amount of power capacity which is outside PPAs, JSW Energy is
vulnerable in the current scenario of rising coal prices and falling short
term tariffs. There could be some respite with the company supplying
some power to Ispat Industries and entering into PPAs for its untied
capacity. We maintain our SELL rating with a reduced target price of
Rs88/sh.
Largest exposure to spot thermal coal
JSW Energy has the largest exposure on spot thermal coal in our utility
coverage. Out of 3.1GW power generation capacity (operational + under
construction), 1.8GW (900MW from Ratnagiri and 860MW at Vijaynagar) has
no fuel cost pass through and thus making it more vulnerable in the current
scenario of high coal prices (see Figure 1). We expect that the company
would need to import ~4mt of coal on spot basis once both Vijaynagar and
Ratnagiri are fully operational.
Contribution from recent coal acquisitions some time away
JSW Energy has done couple of coal mine acquisitions in Africa (Botswana
and South Africa) in last year or so to improve its long term fuel security.
However, in next 3-5 years there won’t be significant production from these
assets and the company would continue to rely on spot market purchases (for
more than 50% of the requirements) for its coal requirements in the interim.
Supply to Ispat and more PPAs could provide stability
JSW Energy is likely to supply power (~250MW) to Ispat Industries from its
Ratnagiri power project post the recent acquisition of 41% stake by JSW Steel
in Ispat. JSW Energy is also bidding for medium term power purchase
agreements (PPAs) for the states of Maharashtra (600MW) and Karnataka
(600MW) from its Ratnagiri and Vijaynagar plants respectively in its efforts to
tie up its untied generation capacity.
Cutting earnings by 17-40%. TP reduced to Rs88/sh. SELL
We are cutting FY11-13 earnings for the company by 17-40% to factor in high
coal costs for spot thermal coal and factoring in commissioning delays for
Ratnagiri and Barmer projects. Our one year forward target price is now
Rs88/sh and we maintain our negative call on the stock.
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