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JSW Energy
Reuters: JSWE.BO Bloomberg: JSW IN Exchange: BSE Ticker: JSWE
Unable to weather fuel pangs; reinstating with Hold
Regulatory hurdles, high fuel cost limits RoE; Hold on balanced risk/reward
This note marks the transfer of coverage from Manish Saxena to Abhishek Puri.
We reinstate our rating on JSW Energy at Hold and our target price at INR50. The
recent upsurge in merchant tariffs (~70% of capacity) could be partially offset by a
regulatory order, resulting in significant under-recoveries for ~12% of capacity and
high cost-curves from spot fuel purchases. Unlike a utility business, earnings
volatility on the back of commodity prices is likely to keep ROE below 12%; but
with 48% underperformance, stock valuations may get support from rising tariffs
Long-term fuel sourcing is the single biggest challenge
While it was good to be an early entrant in merchant markets, the company’s fuel
contracts could not come to pass, as the company’s partner lost out on the rights
to mine in a court case in Indonesia, resulting in sharp earnings volatility. While it
remains in a sweet spot for its southern assets (860MW) on the back of
constraints in grid-connectivity with the rest of India, it remains to be seen how
State Electricity Boards (SEBs) position themselves in an environment of rising fuel
costs and numerous other thermal producers finding constraints on generation.
Regulatory and environmental hurdles have pushed back capacity addition
JSW Energy’s new capacity addition plans of 2.2GW are about 1-3 years behind its
initial plans. Our assumptions factor in remaining capacities to come on-stream
largely in FY14 – implying revenue growth of 21% over the forecast period. Based
on the Deutsche Bank coal forecast of USD120-115/t, we estimate that the
company’s EPS will decline by a 13% CAGR.
Valuations largely pricing in visible concerns, PPA risks to forefront
We value JSW at INR50 on a SoTP basis for its power projects, using 12.5-14.5%
cost of equity, in line with peers, despite the high sensitivity of its earnings to
commodity prices. Although current valuations at 1.2-1.3x BV are pricing in visible
concerns on coal/tariffs, PPA risks in Rajasthan (first-year tariff cap) could impact
valuations further (INR-4/sh impact) if imposed and ROEs are likely to remain
below 12% over the forecast period. Any upside risks may come from waiting for
better fuel or merchant pricing, and/or higher final tariff approvals by regulators
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Energy
Reuters: JSWE.BO Bloomberg: JSW IN Exchange: BSE Ticker: JSWE
Unable to weather fuel pangs; reinstating with Hold
Regulatory hurdles, high fuel cost limits RoE; Hold on balanced risk/reward
This note marks the transfer of coverage from Manish Saxena to Abhishek Puri.
We reinstate our rating on JSW Energy at Hold and our target price at INR50. The
recent upsurge in merchant tariffs (~70% of capacity) could be partially offset by a
regulatory order, resulting in significant under-recoveries for ~12% of capacity and
high cost-curves from spot fuel purchases. Unlike a utility business, earnings
volatility on the back of commodity prices is likely to keep ROE below 12%; but
with 48% underperformance, stock valuations may get support from rising tariffs
Long-term fuel sourcing is the single biggest challenge
While it was good to be an early entrant in merchant markets, the company’s fuel
contracts could not come to pass, as the company’s partner lost out on the rights
to mine in a court case in Indonesia, resulting in sharp earnings volatility. While it
remains in a sweet spot for its southern assets (860MW) on the back of
constraints in grid-connectivity with the rest of India, it remains to be seen how
State Electricity Boards (SEBs) position themselves in an environment of rising fuel
costs and numerous other thermal producers finding constraints on generation.
Regulatory and environmental hurdles have pushed back capacity addition
JSW Energy’s new capacity addition plans of 2.2GW are about 1-3 years behind its
initial plans. Our assumptions factor in remaining capacities to come on-stream
largely in FY14 – implying revenue growth of 21% over the forecast period. Based
on the Deutsche Bank coal forecast of USD120-115/t, we estimate that the
company’s EPS will decline by a 13% CAGR.
Valuations largely pricing in visible concerns, PPA risks to forefront
We value JSW at INR50 on a SoTP basis for its power projects, using 12.5-14.5%
cost of equity, in line with peers, despite the high sensitivity of its earnings to
commodity prices. Although current valuations at 1.2-1.3x BV are pricing in visible
concerns on coal/tariffs, PPA risks in Rajasthan (first-year tariff cap) could impact
valuations further (INR-4/sh impact) if imposed and ROEs are likely to remain
below 12% over the forecast period. Any upside risks may come from waiting for
better fuel or merchant pricing, and/or higher final tariff approvals by regulators
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