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JSW Energy's price performance should remain constricted given its significant exposure to spot
imported coal and merchant prices. The impasse on lignite transfer prices for the Barmer costplus
project casts doubt on the project's profitability. Project earnings and value continue to be at
risk. Hold on valuation.
Growth plans being reconsidered?
JSW plans to expand its generating capacity to 11GW by FY17, from roughly 2.3GW currently.
However, domestic coal shortages, high imported coal prices and environmental clearance may
force the company to scale down these plans, with Ratnagiri-II already deferred due to high
imported coal prices and slow progress on other growth projects. Most private developers in India
are reworking their growth plans in response to these issues.
Large spot imported coal exposure is the biggest concern
JSW’s biggest overhang remains the lack of clarity on fuel supply for projects due to be
operational by FY13 (about 3.2GW). Based on the current fuel supply agreement with Indonesia
and South Africa, JSW would have to import spot coal of about 3m tpa in FY12F and 4m tpa in
FY13F (roughly 60% of its total requirement). Our model factors in a slightly lower imported coal
price in FY13F, given the steps taken by the company to minimise spot coal purchases. In the
current environment, any benefit of a large coal mine acquisition could largely be neutralised by
valuation constraints and/or equity dilution.
Rajwest project impacted by issues pertaining to lignite transfer pricing
JSW’s Rajwest power plant (Units I & II) has been closed since May 2011, pending finalisation of
a tariff order. Rajasthan Electricity Regulatory Commission (RERC) in a recent judgment, asked
JSW to reappoint Mining Development Operator (MDO) for the associated lignite mining, and no
interim tariff was determined for want of fuel cost. The plant has suffered significant time and cost
overruns, and RERC’s recent order casts doubt over project profitability.
Key risks to our thesis are higher merchant prices and lower fuel prices
The obvious risks to our call are higher merchant and lower spot imported coal prices (see Table
3). We initiate coverage with a Hold rating and Rs49 target price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Energy's price performance should remain constricted given its significant exposure to spot
imported coal and merchant prices. The impasse on lignite transfer prices for the Barmer costplus
project casts doubt on the project's profitability. Project earnings and value continue to be at
risk. Hold on valuation.
Growth plans being reconsidered?
JSW plans to expand its generating capacity to 11GW by FY17, from roughly 2.3GW currently.
However, domestic coal shortages, high imported coal prices and environmental clearance may
force the company to scale down these plans, with Ratnagiri-II already deferred due to high
imported coal prices and slow progress on other growth projects. Most private developers in India
are reworking their growth plans in response to these issues.
Large spot imported coal exposure is the biggest concern
JSW’s biggest overhang remains the lack of clarity on fuel supply for projects due to be
operational by FY13 (about 3.2GW). Based on the current fuel supply agreement with Indonesia
and South Africa, JSW would have to import spot coal of about 3m tpa in FY12F and 4m tpa in
FY13F (roughly 60% of its total requirement). Our model factors in a slightly lower imported coal
price in FY13F, given the steps taken by the company to minimise spot coal purchases. In the
current environment, any benefit of a large coal mine acquisition could largely be neutralised by
valuation constraints and/or equity dilution.
Rajwest project impacted by issues pertaining to lignite transfer pricing
JSW’s Rajwest power plant (Units I & II) has been closed since May 2011, pending finalisation of
a tariff order. Rajasthan Electricity Regulatory Commission (RERC) in a recent judgment, asked
JSW to reappoint Mining Development Operator (MDO) for the associated lignite mining, and no
interim tariff was determined for want of fuel cost. The plant has suffered significant time and cost
overruns, and RERC’s recent order casts doubt over project profitability.
Key risks to our thesis are higher merchant prices and lower fuel prices
The obvious risks to our call are higher merchant and lower spot imported coal prices (see Table
3). We initiate coverage with a Hold rating and Rs49 target price.
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