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JSW Energy (JSW)
Utilities
Coal constrained. JSW Energy reported disappointing results, failing to capitalize on
strong merchant rates in South India leading up to the assembly elections. Excessive
dependence on spot purchase of imported coal and high proportion of merchant sales
lends to our cautious stance, strengthened by faltering fuel tie-ups – supplies from
Sungai Belati are unlikely to materialize while acquisition of CIC energy is still in the
limbo. Downgrade to SELL (from REDUCE) with a revised target price of Rs70
(previously Rs82).
Results miss estimates on lower-than-estimated merchant realization
JSW Energy reported consolidated revenues of Rs14.1 bn (80% yoy, 33% qoq), operating profit of
Rs4.1 bn (24% yoy, 21% qoq) and net income of Rs2.1 bn (-25% yoy, 35% qoq) against our
estimate of Rs14.2 bn, Rs4.8 bn and Rs2.2 bn, respectively. Reported revenues include power
trading and transmission revenues of ~Rs950 mn, adjusting for which, revenues from power sales
miss our estimates by 7.5% primarily due to lower-than-estimated merchant realization. Reported
PAT was marginally boosted by lower-than-estimated interest expense primarily on account of
refinancing of debt which resulted in 155 bps reduction in gross interest cost. We discuss the
operational details of 4QFY11 results in subsequent section.
Supplies from Sungai Belati at risk, CIC acquisition still in the limbo
JSW Energy continues to face uncertainty over long-term fuel supply arrangements—inability to
source coal from Sungai Belati further increases the dependence on spot purchases. We estimate
JSW Energy’s dependence on spot purchase of coal to increase to 4 mtpa (2.8 mtpa previously).
Management has indicated that supplies from Sungai Belati will likely not materialize in near term
owing to issues with mining lease (original plan was to contract 7.5 mtpa subsequently revised to
2 mtpa). Meanwhile, the closure date for completion of CIC Energy acquisition has been extended
further up to May 31, 2011, after CIC Energy has not been able to meet certain conditions
precedent to the deal. We note that this is the third extension following extensions in February
and March 2011.
Downgrade to SELL with a revised target price of Rs70/share
We downgrade JSW Energy to SELL (from REDUCE) with a revised target price of Rs70/share
(previously Rs82/share). Our target price comprises value for 3,140 MW of operational and underconstruction
projects. In our view, excessive dependence on spot purchase of imported coal and
high proportion of merchant sales makes earnings susceptible to (1) rising prices of coal and (2)
moderating short-term tariffs.
We do not ascribe any value to the development portfolio though highlight that visible traction on
these project could be a key upside risk to our earnings and valuation estimates.
Operational highlights of 4QFY11
Generation – net generation for 4QFY11 increased sharply 3,013 MU (68% yoy, 26%
qoq) driven by commissioning of 300 MW unit at Ratnagiri in December 2010. Vijaynagar
units clocked an impressive PLF of 99.5% while PLFs for Ratnagiri and Barmer were
82.4% and 64.2%, respectively.
Realization – average realization for 4QFY11 was Rs4.38/kwh (3% yoy, -1% qoq).
Average merchant realization was Rs4.71/kwh (2.6%, -3%qoq). The yearly jump was
primarily driven by healthy realization at Vijayanagar of ~Rs5/kwh in 4QFY11. JSW Energy
sold 67% of total generation on merchant basis.
Capacity addition – no capacity was added during 4QFY11 but the quarter had full
impact of operations of Unit 2 of Ratnagiri (300 MW) which was commissioned in
December 2010. For FY2011, JSW Energy added 750 MW.
Fuel cost and O&M – estimated fuel cost and O&M for 4QFY11 was Rs2.6/kwh (31% yoy,
5% qoq) and 23p/kwh (-16% yoy, -17% qoq), respectively.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Energy (JSW)
Utilities
Coal constrained. JSW Energy reported disappointing results, failing to capitalize on
strong merchant rates in South India leading up to the assembly elections. Excessive
dependence on spot purchase of imported coal and high proportion of merchant sales
lends to our cautious stance, strengthened by faltering fuel tie-ups – supplies from
Sungai Belati are unlikely to materialize while acquisition of CIC energy is still in the
limbo. Downgrade to SELL (from REDUCE) with a revised target price of Rs70
(previously Rs82).
Results miss estimates on lower-than-estimated merchant realization
JSW Energy reported consolidated revenues of Rs14.1 bn (80% yoy, 33% qoq), operating profit of
Rs4.1 bn (24% yoy, 21% qoq) and net income of Rs2.1 bn (-25% yoy, 35% qoq) against our
estimate of Rs14.2 bn, Rs4.8 bn and Rs2.2 bn, respectively. Reported revenues include power
trading and transmission revenues of ~Rs950 mn, adjusting for which, revenues from power sales
miss our estimates by 7.5% primarily due to lower-than-estimated merchant realization. Reported
PAT was marginally boosted by lower-than-estimated interest expense primarily on account of
refinancing of debt which resulted in 155 bps reduction in gross interest cost. We discuss the
operational details of 4QFY11 results in subsequent section.
Supplies from Sungai Belati at risk, CIC acquisition still in the limbo
JSW Energy continues to face uncertainty over long-term fuel supply arrangements—inability to
source coal from Sungai Belati further increases the dependence on spot purchases. We estimate
JSW Energy’s dependence on spot purchase of coal to increase to 4 mtpa (2.8 mtpa previously).
Management has indicated that supplies from Sungai Belati will likely not materialize in near term
owing to issues with mining lease (original plan was to contract 7.5 mtpa subsequently revised to
2 mtpa). Meanwhile, the closure date for completion of CIC Energy acquisition has been extended
further up to May 31, 2011, after CIC Energy has not been able to meet certain conditions
precedent to the deal. We note that this is the third extension following extensions in February
and March 2011.
Downgrade to SELL with a revised target price of Rs70/share
We downgrade JSW Energy to SELL (from REDUCE) with a revised target price of Rs70/share
(previously Rs82/share). Our target price comprises value for 3,140 MW of operational and underconstruction
projects. In our view, excessive dependence on spot purchase of imported coal and
high proportion of merchant sales makes earnings susceptible to (1) rising prices of coal and (2)
moderating short-term tariffs.
We do not ascribe any value to the development portfolio though highlight that visible traction on
these project could be a key upside risk to our earnings and valuation estimates.
Operational highlights of 4QFY11
Generation – net generation for 4QFY11 increased sharply 3,013 MU (68% yoy, 26%
qoq) driven by commissioning of 300 MW unit at Ratnagiri in December 2010. Vijaynagar
units clocked an impressive PLF of 99.5% while PLFs for Ratnagiri and Barmer were
82.4% and 64.2%, respectively.
Realization – average realization for 4QFY11 was Rs4.38/kwh (3% yoy, -1% qoq).
Average merchant realization was Rs4.71/kwh (2.6%, -3%qoq). The yearly jump was
primarily driven by healthy realization at Vijayanagar of ~Rs5/kwh in 4QFY11. JSW Energy
sold 67% of total generation on merchant basis.
Capacity addition – no capacity was added during 4QFY11 but the quarter had full
impact of operations of Unit 2 of Ratnagiri (300 MW) which was commissioned in
December 2010. For FY2011, JSW Energy added 750 MW.
Fuel cost and O&M – estimated fuel cost and O&M for 4QFY11 was Rs2.6/kwh (31% yoy,
5% qoq) and 23p/kwh (-16% yoy, -17% qoq), respectively.
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