JSW Energy- Setting a bearish tone for FY12 :: Macquarie Research

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JSW Energy
Setting a bearish tone for FY12
Event
 JSW Energy reported NPAT of Rs.8.4bn, 10% below our estimate which was
below consensus (which has been coming down in recent weeks). Key
variation from our forecast was higher operating and interest costs. Going
forward, management expects merchant prices to soften further and fuel costs
to remain around Rs.2.6-2.8/kWh.

 Retain a Neutral with the stock trading in line with our price target of
Rs.79/share. We continue to view JSW Energy as a trading stock, with
earnings highly leveraged to merchant price realisations and seaborne
thermal coal prices. While 1Q merchant realisations are seasonally strong, we
still expect the market to digest softer pricing post several State elections in
the near term, which could lead to a more attractive buying opportunity.
Impact
 Key take-aways from analyst meet:
Average merchant realisations of Rs.4.50-4.75/kWh expected in FY12
50% volumes sold via merchant in FY12 vs. 67% in FY11
Capacity additions - currently synchronising third Ratnagiri Unit 3
(300MW) with Unit 4 (300MW) expected in June. Barmer units 3 and 4
(135MW each) anticipated in May and June.
Fuel costs around Rs.2.60-2.80/kWh for FY12.
Refi another Rs.15-18bn of debt this quarter at lower rates (achieved
1.55% saving in FY11 via Rs.30bn refinancing).
 Bearish FY12 margin outlook for sector: with JSW Energy noting, “Though
the sector is expected to add significant generation capacity in fiscal 2012, the
concerns on availability and price of coal (domestic and imported) as also
enhanced power procurement plans of State utilities may impact the margins
of Generating Companies.”
 Are you contrarian? To buy this stock at current prices for material upside
would require the view that imported coal prices will materially decrease over
the next 12 months and/or expect SEBs to sustainably procure base-load
power at the top of the cost curve. We currently think there is risk to this view.
Earnings and target price revision
 Actuals for FY11 (NPAT -10%). No change to FY12/FY13 estimates.
Price catalyst
 12-month price target: Rs79.00 based on a DCF methodology.
 Catalyst: softening power prices over next few months,
Action and recommendation
 Neutral.