India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Energy: The balancing act
Exposure to merchant power sales, spot coal purchases
Merchant power sales and spot coal purchases are the cornerstones of JSW Energy's
(JSWEL's) business model in the medium term, which could lead to earnings volatility in
an uncertain environment. JSWEL will commission 1.7GW capacity in FY12/FY13 and will be
among the largest private sector power utilities. Development pipeline of 8GW offers
value maximization opportunities but will contribute to capacity additions from FY15. The
management has an impeccable track record for execution. Robust operational cashflows
and comfortable DER at 1.7x imply the growth option is not equity dilutive. Our SOTP based
target price is Rs74. We maintain Neutral rating.
Merchant power sales, spot coal purchases, could lead to earnings volatility
JSWEL's business model in the medium term combines merchant power sales and
spot coal purchases, resulting in earnings volatility. Of the 3.1GW operational capacity
planned by FY12, 56% of the offtake will be merchant sales and 65% of the fuel
purchases will be on a spot basis (imported). Merchant sales will contribute over 80%
to FY12 earnings and 67% in FY13 and Rs0.50/unit lower realization can result in 40-
50% earnings decline.
Robust near term cashflows, but FY13-14 could be a growth holiday
JSWEL will commission 1.7GW capacity in FY12 / FY13 and installed capacity will
be 3.4GW in FY13. Given the front ended capacity commissioning, operational cashflow
will be robust (Rs25b in FY13). The development pipeline of 8GW offers value
maximization possibilities, but large parts of the pipeline are in initial stages of
development and hence capacity addition over FY13-14 will be limited. Given JSWEL's
robust cashflows, we believe the growth will not be equity dilutive.
Superior RoE until FY12, earnings CAGR of 17% over FY11-13
We expect JSWEL to post net earnings CAGR of 17% over FY11-13 driven by capacity
addition (3.1GW by FY12 v/s 1.7GW now). We expect RoE of 19% in FY12 (up from
15.5% in FY11) but it will decline to 16% in FY13 due to low profitability from merchant
sales and high project investments, given a fresh round of capacity additions.
Valuation and view - Neutral with target price of Rs74
We value JSWEL based on the SOTP methodology, arriving at a target price of Rs74.
This comprises projects under operation/construction worth Rs44/share (DCF), growth
option comprising planned/developed projects of Rs14/share (DCF) and investments/
cash of Rs16/share. We believe the price largely reflects the robust near term capacity
addition and strong cashflows. The group's record of execution, project management
and robust cashflows offer comfort. We maintain Neutral rating.
No comments:
Post a Comment