JSW Energy: Merchant Power :: Karvy

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Merchant Power Player with High Fuel Risks
JSW Energy (JSWEL) stands lower in our fuel security theme due to its
high exposure to merchant market and excessive dependence on imported
coal. Our view also factors cancellation of mine allotted to Sungi Belati (SB)
that was supposed to supply 2 MTPA of coal at US$36 per MT (FoB) and
sharp rise in spot prices in global markets. We believe that this will further
increase JSWEL’s exposure to imported coal.
High Exposure to Merchant Power Leading to Earnings Volatility
Out of JSWEL’s total capacity of 3,140MW, 55% would be under the
merchant route which would make JSWEL susceptible to merchant rates.
In our opinion the merchant rates would soften further on the back of
incremental capacity and back-out of the SEBs. We assume merchant rates
of Rs. 4 per KWh in FY12E, declining to Rs. 3.5 per KWh in FY13E, and
remaining at this level until FY15E, and would rise 2% thereafter.
Excessive Dependence on Spot Imported Coal – Pricing Risk
Ahead
A major chunk of JSWEL's FY13E capacity (65%) would operate on
imported coal. Given the huge demand from India & China, the spot coal
prices are likely be above US$120 per tonne till FY14E. We believe high
fuel cost dents the IRR of the projects to 19%.
Capacity Growth to taper off beyond FY12E
We expect JSWEL to hike capacity to 3,140MW in FY13E from 2,000MW
currently. The next major rise in capacity will not take place until FY15E,
when we expect addition of 300MW from West Bengal-I and Phase-I of
1,320MW from Ratnagiri-II. Again, the visibility on JSWEL’s pipeline
projects is low, as these projects still await certain clearances. The cashflow
from 3.1GW (operational by FY12E) capacity suggests potential need
for equity dilution of 15-20% in FY14-15E for total capex of Rs. 413 bn
provided all the projects go on stream.
Valuation
At the CMP, JSWEL is trading at 1.6x and 1.4x its FY12E and FY13E P/BV,
respectively, and at EV/EBITDA of 7.4x on FY13E. We have arrived at a fair
price of Rs. 75 for JSWEL by valuing 7,960MW of capacity under the FCFE
methodology.
Our fair price implies an upside of 12% from the CMP, and we initiate
coverage on the stock with a “HOLD” recommendation.