JSW Energy: Wager gone awry :: Kotak Sec

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JSW Energy (JSW)
Utilities
Wager gone awry. JSW Energy’s reported loss for 2QFY12 reflects our long-standing
concerns on dependence on market prices for purchase of coal and merchant rates for
sale of power. JSW Energy’s fuel cost rose 26% yoy (Rs3/kwh), while its realizations
came off 14% yoy (Rs3.7/kwh). Further, shutdown of the Barmer facility due to highcost
of generation (and approval of tariffs) further aggravated the reported income.
We continue to remain skeptical on the extant model which is leveraged to spot prices;
maintain REDUCE with a revised target price of Rs53/share (Rs60 previously).

Beaten down by operational challenges and currency depreciation

JSW Energy reported consolidated revenues of Rs9.6 bn (25% yoy, -16% qoq), operating profit of

Rs793 mn (-68% yoy, -70% qoq) and net loss of Rs301 mn against our estimate of Rs10.9 bn,

Rs2.1 bn and net income of Rs255 mn, respectively. Disappointment was primarily driven by (1)

lower-than-estimated sale of energy (2,307 MU against our estimate of 2,513 MU) on account of

operational glitches as well as backing down by state distribution utilities (2) lower-than-estimated

realizations (Rs3.74/kwh against our estimate of Rs4.28/kwh) and (3) higher-than-estimated fuel

cost likely on account of Rupee depreciation. Reported loss of Rs1,089 mn includes Rs788 mn of

forex translation losses. We discuss key highlights of 1QFY12 results in detail in a subsequent

section.

Seasonal weakness in pricing and volume aggravated further by currency depreciation

JSW Energy registered power sales declined 5% sequentially while average realizations dipped

sharply by 22% qoq as seasonal weakness coupled with selective and judicious power purchases

by state utilities led to lower volumes and merchant tariffs. We note that despite net generation of

2,593 MU in 2QFY12, total sale was 2,307 MU (including 229 MU of conversion for JSW Steel) as

286 MU was tied up in banking arrangement, sale for which will be recognised in subsequent

quarters (explained later). Further, fuel cost jumped 14% sequentially despite the prices of

imported coal remaining fairly stable primarily on account of rupee depreciation.

Maintain REDUCE with a revised target price of Rs53/share

We maintain our REDUCE rating with a revised target price of Rs53/share (previously Rs60/share)

as we adjust for (1) Rupee depreciation and (2) higher dependence on spot purchases of coal. Our

target price comprises value for 3,140 MW of operational and under-construction projects. In our

view, excessive dependence on spot purchase of imported coal and high proportion of merchant

sales makes earnings susceptible to (1) rising prices of coal and (2) moderating short-term tariffs.

We do not ascribe any value to the development portfolio though highlight that visible traction on

these project could be a key upside risk to our earnings and valuation estimates.