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JSW Energy (JSWE.BO)
Sell
Below expectations on higher costs and lower output; Sell
What surprised us
JSW Energy (JSWE) reported 2QFY2011 PAT of Rs1.846 bn which is
13%/25% below our and Bloomberg consensus estimates primarily due to
1) higher fuel costs (Rs2.6/kwh vs Rs2.2/kwh qoq) due to firming up of
international coal prices; and 2) lower output because of the maintenance
shut down for two units of its Vijainagar plant. The average realization has
dropped 7% qoq, primarily due to higher proportion of non-merchant sales
at 36% vs 32% in 1QFY2011.
Though JSWE’s capacity earmarked for the short-term market is tied up at
Rs5.5/kwh until March 2011, and therefore less uncertainty on realizations
for next two quarters, we believe FY12E consensus earnings are at risk as
they are reflecting merchant prices of Rs5/kwh. We are 40% below
consensus on FY12E earnings as we expect merchant prices of Rs4/kwh in
FY12E on: 1) a 30% increase in merchant power supplies; 2) further
deterioration of finances of state electricity boards reducing their ability to
fund expensive power purchases, in our view. JSWE has high sensitivity to
merchant power prices: EPS changes 25% for each 10% change in shortterm
rates.
What to do with the stock
We reiterate our Sell on JSWE with a 12-month SOTP-based price target of
Rs105, implying potential downside of 12%. Unlike its peers, JSWE does
not have the volume growth to offset the decline in merchant prices in
FY13E. The stock appears expensive on P/E and P/B vs ROE. Key risks
include entering into attractive PPA rates on a long-term mechanism.
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