JSW Energy- Upgrade to Buy.- Favorable times ahead; 79% EPS CAGR over FY12-14E ::Motilal oswal

Favorable times ahead; 79% EPS CAGR over FY12-14E
Softening coal prices, Raj West CoD key triggers; Buy for 27% upside
 JSW Energy's (JSWEL) performance was hit due to its "converter" business model with
open exposure on coal. Correction in global coal prices has improved the situation.
 CoD of Raj West project (Sep-12) would pave way for final tariff , removing uncertainty
on under-recovery for an otherwise regulated return project. This along with group
captive will mean offtake mix in favor of regulated projects, reducing earnings volatility.
 Expect FY12-14 EPS CAGR of 79%. Reasonable valuation (FY14E P/E of 8x, P/BV of 1.2x)
and lowest DER among peers (1.5x) provide further comfort. Upgrade to Buy.

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Beneficiary of lower thermal coal prices: Global thermal coal indices are down
~35% since their peak in Dec-10, led by changing US energy dynamics, slowdown
in demand from China, etc. Even in INR term, the indices are down by ~17%
despite rupee depreciation. JSWEL is a key beneficiary with ~1.5GW merchant
capacity located in high-deficit consumption regions. For FY12, JSWEL's standalone
reported fuel cost at INR2.84/unit (v/s INR2.53/unit YoY), and we expect
moderation over 8-10% over FY13E/14E. We assume average Richard Bay's index
at UD90/ton for FY13 and USD88/ton for FY14 v/s current price of below USD85/ton.
Raj West CoD – an important delta for FY13/14E earnings: Delayed commissioning
and under-recoveries led to negative contribution from project in FY11 and FY12.
Entire project (1,080MW) is expected to be commissioned by 1HFY13 (540MW
already commissioned), which would pave the way for final tariff petition/order
approval from regulator. This should, in our view, remove uncertainty on underrecoveries
for an otherwise regulated return project. Approval of variable cost
of lignite (INR1,981/ton v/s approved cost of INR1,193/ton in Apr-12 interim order)
is critical to improved profitability. Against INR880m loss in FY12, we expect
positive contribution of INR64m in FY13, rising further to INR3.3b in FY14.
Growth option limited in near term: JSWEL is working on 240MW Kutehr hydro
project and 270MW expansion at Raj West, and has additional 6.5GW of thermal
project pipeline (55% on imported coal). Most of these projects are in the initial
stages of construction or final stage of development and thus growth option is
limited. Capital allocation to new projects and no diversion to "non-core"
business, progress on on-going projects, and fuel/PPA mix remain critical factors.
We assign no growth option as would wait for projects to attain critical milestones.
Robust earnings growth, lowest DER and valuation provide comfort, Buy: Expect
JSWEL's consolidated EPS CAGR of 79% over FY12-14, driven by fuel cost savings
and full year contribution from Raj West in FY14. JSWEL's FY12 net DER is 1.5x
(among lowest in peers), which would further moderate over next 2 years. Our
FY13 assumptions of USD90/ton RB index and peak PLF of 85% for Ratnagiri/
Vijaynagar projects are reasonable in our view. USD1/ton fall in RB index and
currency appreciation of INR1/USD improves FY13/14 PAT by 3%/2% and 6%/3%,
respectively. Our SOTP target price of INR65 offers 27% upside. Upgrade to Buy.