JSW Energy -Cutting FY12 EPS on lower merchant :: Macquarie Research

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JSW Energy
Cutting FY12 EPS on lower merchant
Event
 We have lowered our FY12 merchant power price forecast by Rs.0.50/kWh to
Rs.4.00/kWh which has reduced our FY12 EPS forecast by ~25%. We also
assume higher fuel costs which further lowers our FY12 EPS forecast by
another 7% (32% in total). Our price target falls from Rs.89/share to
Rs.79/share.

 Power prices in the Southern region have recently been strong, while
seaborne thermal coal prices have come off post the Japan earthquake - both
improving sentiment for JSW Energy. However we expect power markets to
turn more bearish post State Elections and heading into a potentially ‘normal’
monsoon. Restocking from Chinese coal-fired IPPs, increasingly buying from
Indonesia, could see thermal prices remain firm or increase. The stock trades
close to our price target of Rs.79/share, hence our Neutral recommendation
however we anticipate further earnings downgrades in the market (we are
~20% below consensus FY12E and FY13E EPS).
Impact
 Merchant power downgrade in FY12: we have reduced our FY12 merchant
power price forecast to Rs.4.00/kWh from Rs.4.50/kWh. While much is
dependant on the monsoon - currently forecast by IMD to be within 4% of
‘normal’ rainfall volumes - the impact to JSW Energy’s EPS is significant due
to its operational leverage (imported coal costs) and uncontracted off-take.
 Recent force majeure from Sungai Belati increases costs: we have also
increased our coal procurement costs to reflect more expensive spot coal
from Indonesia following the force majeure from Sungei Belati, which were
expected to supply 2mtpa to JSW Energy at ~US$35/t FOB.
 High leverage – what would be the contrarian view: earnings for JSW
Energy are highly sensitive to power and coal price forecasts. For those
bearish on thermal coal prices and bullish merchant power prices (opposite of
our view), this stock would clearly outperform. This may play out beyond
FY12, but we see downside risk to this view in the medium term.
Earnings and target price revision
 FY12 EPS -32% and price target from Rs.89 to Rs.79/share.
Price catalyst
 12-month price target: Rs79.00 based on a DCF methodology.
 Catalyst: FY11 results on 28th April and softer merchant power prices in
Southern region post April.
Action and recommendation
 Retain Neutral recommendation. We prefer IPPs with solid volume growth and
some form of competitive fuel positioning such as Adani Power (ADANI IN,
Rs115.10, OP, TP: Rs134) and Jindal Steel and Power (JSP IN, Rs661.85,
OP, TP: Rs938) and Tata Power (TPWR IN, Rs1299.05, OP, TP: Rs1553) or
more defensive plays in Indian Utilities such as TPW and CESC (CESC IN,
Rs307.05, OP, TP: Rs384).