JSW Energy- Still downside from here :: Macquarie Research,

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JSW Energy
Still downside from here
Event
 We downgrade JSW Energy back from Neutral to Underperform. The stock
has traded sideways over the past six months as the market has appeared to
assess any upside potential from merchant power pricing. While in the short
term 1Q11 realisations could benefit from strong southern region pricing in
April 2011 (Tamil Nadu State election), the risk going into monsoon is that
power prices could fall further and Ratnagiri could struggle to get scheduled
due to its reliance on high-cost imported spot coal, where we see upside to
pricing as Japanese coal demand comes back into the market. We reduce our
price target from Rs79/share to Rs56/share.
Impact
 Tough demand environment to put further pressure on pricing: feedback
from industry contacts on the ground still point to worsening conditions
regarding Indian power demand and pricing. Price expectations from traders
over the next 12 months have fallen from ~Rs4/kWh three months ago to
Rs3.30-3.80/kWh. Appetite from some seasonal monsoon buyers
(Haryana/Delhi) is expected to be weaker this year, while new supply is
expected to overload both bilateral and exchange markets.
 We have lowered earnings by 20% in FY12 and 14% in FY13 based on
higher coal sourcing costs, assuming that a higher proportion of fuel supply is
sourced from the spot thermal market. We also reduce our PLF assumption
from 90% to 85%. The key risk to our assumptions is if seabourne thermal
coal prices materially fall.
 Lowering ROE of growth potential: we also reduce the valuation given to
growth projects from Rs6/share to Rs2/share, based on the changing ROE
profiles of additional investments in Indian power generation, while updating
our capex forecasts and cash position.
Earnings and target price revision
 We reduce our FY12 and FY12 EPS forecasts by 23% and 14%, respectively,
and lower our price target from Rs79 to Rs56.
Price catalyst
 12-month price target: Rs56.00 based on a DCF methodology.
 Catalyst: lower merchant realisations between June-August.
Action and recommendation
 Downgrade to Underperform. JSW Energy trades at a premium to the sector
on 11.6x FY13E NPAT (IPPs at 10.3x FY13E NPAT) and there seems little
respite to falling merchant prices and ongoing tightness in seaboune thermal
markets. Such cost pressure will likely see the stock Underperform in our
view.