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JSW Energy (JSW)
Utilities
Merchant wager. We initiate coverage on JSW Energy with a REDUCE rating and
target price of Rs82/share. JSW Energy, with an operational capacity of 1,730 MW, has
enjoyed super-normal returns from the merchant sale of power in the past. However,
we are cautious on account of the company’s dependence on spot purchases of coal
and high proportion of merchant sales in an environment of rising commodity prices
and softening merchant tariffs.
Initiating coverage with a REDUCE rating and target price of Rs82/share
We initiate coverage on JSW Energy with a REDUCE rating and target price of Rs82/share. At our
target price, JSW Energy will trade at a P/E multiple of 8X and P/B of 1.7X on FY2012E EPS and
book value, respectively. Our target price comprises value for 3,140 MW of operational and underconstruction
projects. Dependence on the purchase of imported coal on a spot basis and a high
proportion of merchant sales poses risks to earnings from (1) rising prices of coal and (2)
moderating short-term tariffs. We factor 56% of merchant sale at a sustainable realization of
Rs3.5/kwh and assume sustainable prices of imported coal (from South Africa) at US$90/ton (FOB).
We prefer using an SOTP of the DCF-to-equity value of various power projects to value a utility
company.
Near-term commissioning of projects to drive earnings and cash flows
We estimate JSW Energy’s revenues and net profits to increase at a CAGR of 33% and 18%,
respectively, during FY2010-14E. JSW Energy plans to increase its generation capacity to 11,390
MW by FY2016E from 1,730 MW at present. Projects with generation capacity of 1,410 MW are
already under construction and will likely commission by FY2012E. JSW Energy has already infused
most of the equity required for its current portfolio of projects under construction, as the company
has incurred a capex of Rs119 bn (as of March 2010) out of a total project outlay of Rs130 bn for
its portfolio of operational and under-construction projects.
Key risks: Project implementation, fuel availability and pricing
With an estimated 46% of the planned 11,390 MW of generation capacity dependent on
imported coal and another 38% dependent on development of new mines in India (balance 16%
on linkage coal and hydro), availability and pricing of fuel is the prime concern for JSW Energy.
Delays and cost overruns in project implementation pose risks as JSW Energy plans to implement
several large projects simultaneously over the next few years. Merchant power plants expose the
company to cost escalations (including interest rates, project costs etc.) and power offtake.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Energy (JSW)
Utilities
Merchant wager. We initiate coverage on JSW Energy with a REDUCE rating and
target price of Rs82/share. JSW Energy, with an operational capacity of 1,730 MW, has
enjoyed super-normal returns from the merchant sale of power in the past. However,
we are cautious on account of the company’s dependence on spot purchases of coal
and high proportion of merchant sales in an environment of rising commodity prices
and softening merchant tariffs.
Initiating coverage with a REDUCE rating and target price of Rs82/share
We initiate coverage on JSW Energy with a REDUCE rating and target price of Rs82/share. At our
target price, JSW Energy will trade at a P/E multiple of 8X and P/B of 1.7X on FY2012E EPS and
book value, respectively. Our target price comprises value for 3,140 MW of operational and underconstruction
projects. Dependence on the purchase of imported coal on a spot basis and a high
proportion of merchant sales poses risks to earnings from (1) rising prices of coal and (2)
moderating short-term tariffs. We factor 56% of merchant sale at a sustainable realization of
Rs3.5/kwh and assume sustainable prices of imported coal (from South Africa) at US$90/ton (FOB).
We prefer using an SOTP of the DCF-to-equity value of various power projects to value a utility
company.
Near-term commissioning of projects to drive earnings and cash flows
We estimate JSW Energy’s revenues and net profits to increase at a CAGR of 33% and 18%,
respectively, during FY2010-14E. JSW Energy plans to increase its generation capacity to 11,390
MW by FY2016E from 1,730 MW at present. Projects with generation capacity of 1,410 MW are
already under construction and will likely commission by FY2012E. JSW Energy has already infused
most of the equity required for its current portfolio of projects under construction, as the company
has incurred a capex of Rs119 bn (as of March 2010) out of a total project outlay of Rs130 bn for
its portfolio of operational and under-construction projects.
Key risks: Project implementation, fuel availability and pricing
With an estimated 46% of the planned 11,390 MW of generation capacity dependent on
imported coal and another 38% dependent on development of new mines in India (balance 16%
on linkage coal and hydro), availability and pricing of fuel is the prime concern for JSW Energy.
Delays and cost overruns in project implementation pose risks as JSW Energy plans to implement
several large projects simultaneously over the next few years. Merchant power plants expose the
company to cost escalations (including interest rates, project costs etc.) and power offtake.
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