In a sweet spot JSW Energy’s 3QFY15 :: HDFC Securities

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In a sweet spot JSW Energy’s 3QFY15 APAT of Rs 3.8bn was ahead of below our estimate of Rs 3.2bn primarily due to lower other expenses and interest costs. Acquisition of Jaiprakash Power Ventures’ (JPVL) 1.4GW operational hydro plants is expected to be finished by 1QFY16. Company is looking for further acquisitions and has also passed an enabling resolution to raise Rs 50bn through equity/equity linked instruments. JSW Energy is currently in a sweet spot as weakness in global coal prices will boost earnings while merchant tariffs remain strong. Its strong balance sheet also enables it to bid for stressed assets/coal blocks which can be value accretive in the long run. We revise our merchant tariff (4.5/unit vs. 4 earlier) and coal price (US$ 60/tonne vs. 75 earlier) assumptions and consequently increase FY16/17 EPS by 45%. Retain Neutral with a revised TP of Rs 112/sh (from Rs 76).  Imported coal cost/unit was Rs 2.3 (down 12% QoQ) due to lower coal prices. Merchant realisation for 9MFY15 was slightly higher than Rs 4.5/unit and the management expects it to be stronger in FY16. Short term sales were 44% of total sales for 9MFY15.  Acquisition of JPVL’s hydro assets is expected to be completed by 1QFY16. Company intends to fund the equity consideration by a mix of debt and internal accruals. (Refer to our report dated 19th Nov 14).  The company intends to bid for coal blocks but did not divulge further details. Management also intends to increase long term sales proportion which may cap returns in the long term while reducing risks.  We expect merchant tariffs in South India to remain strong as full integration of Southern grid with NEW grid is not expected before Mar-17. An industrial recovery in India will provide further fillip to power demand and merchant rates. Global coal price trend is also expected to remain subdued. However, current valuation at 2x FY17E BVPS factors most of the positives in our view. Retain Neutral

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