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JSW Energy Ltd.
▼ Underweight; Previous: Neutral; JSWE.BO, JSW IN
Things could get worse before they get better; downgrade to UW
The stock has seen sharp a correction, but it’s still not too late to sell:
The correction over the past 12 months has been in-line with that seen by
private IPP peers, and is due to issues such as execution delays, high
funding costs, rising fuel prices, and merchant price volatility affecting the
whole sector. Among peers, JSW compares unfavorably, in our view, as (1)
it has the highest risk profile given maximum exposure to spot fuel and spot
tariffs, (2) has the weakest medium-term capacity growth outlook, and (3)
post our 37%/28% FY12E/13E earnings cuts, is one of the most expensive
IPPs at 17x FY13E P/E and 1.7x P/BV, which we believe is unjustified.
Assurances from management in the earnings call were already in our
estimates: These include: (1) lignite transfer pricing regulation and re-start
of Barmer plant very soon; (2) one-off write-offs and plant shut-downs
partly impacting Jun-q; (3) completion of remaining units of Ratnagiri and
two more units of Barmer this year; and (4) easing fuel costs this year. On
the other hand, the gloomier outlook provided on spot power prices was the
major negative: our EPS cuts are significantly attributable to merchant price
cuts of ~8%. Project completion delay and under-recovery of Barmer fixed
costs account for the rest.
Our downgrade to UW is underpinned by the problem of India’s
financially weak distcoms restricting purchases from expensive
generators (such as JSW): We see this as a long-term problem. Our
reduced SOTP-based Mar-12 PT of Rs55 (earlier, Rs60) includes Rs1 for
the coal mines (Rajasthan and South Africa), Rs1 for the transmission line,
and the remainder for power plants, based on DCF.
Playing the devil's advocate – when would we buy? The stock is severely
under-owned by institutions, making it appealing to a contrarian investor.
However, we would look for the following before turning positive: (1)
positive momentum in merchant prices, which tends to have a
disproportionate impact on JSW earnings, (2) any change in company
strategy to tie up sales via medium-long-term PPAs, which would lower risk
profile and warrant a re-rating, albeit with further earnings cut (as LT PPA
prices are lower than ST), and (3) a concrete move towards fuel security and
cost predictability. We think an entry point of Rs50-55 would factor in these
risks and we recommend a switch to Adani Power (OW) among IPPs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Energy Ltd.
▼ Underweight; Previous: Neutral; JSWE.BO, JSW IN
Things could get worse before they get better; downgrade to UW
The stock has seen sharp a correction, but it’s still not too late to sell:
The correction over the past 12 months has been in-line with that seen by
private IPP peers, and is due to issues such as execution delays, high
funding costs, rising fuel prices, and merchant price volatility affecting the
whole sector. Among peers, JSW compares unfavorably, in our view, as (1)
it has the highest risk profile given maximum exposure to spot fuel and spot
tariffs, (2) has the weakest medium-term capacity growth outlook, and (3)
post our 37%/28% FY12E/13E earnings cuts, is one of the most expensive
IPPs at 17x FY13E P/E and 1.7x P/BV, which we believe is unjustified.
Assurances from management in the earnings call were already in our
estimates: These include: (1) lignite transfer pricing regulation and re-start
of Barmer plant very soon; (2) one-off write-offs and plant shut-downs
partly impacting Jun-q; (3) completion of remaining units of Ratnagiri and
two more units of Barmer this year; and (4) easing fuel costs this year. On
the other hand, the gloomier outlook provided on spot power prices was the
major negative: our EPS cuts are significantly attributable to merchant price
cuts of ~8%. Project completion delay and under-recovery of Barmer fixed
costs account for the rest.
Our downgrade to UW is underpinned by the problem of India’s
financially weak distcoms restricting purchases from expensive
generators (such as JSW): We see this as a long-term problem. Our
reduced SOTP-based Mar-12 PT of Rs55 (earlier, Rs60) includes Rs1 for
the coal mines (Rajasthan and South Africa), Rs1 for the transmission line,
and the remainder for power plants, based on DCF.
Playing the devil's advocate – when would we buy? The stock is severely
under-owned by institutions, making it appealing to a contrarian investor.
However, we would look for the following before turning positive: (1)
positive momentum in merchant prices, which tends to have a
disproportionate impact on JSW earnings, (2) any change in company
strategy to tie up sales via medium-long-term PPAs, which would lower risk
profile and warrant a re-rating, albeit with further earnings cut (as LT PPA
prices are lower than ST), and (3) a concrete move towards fuel security and
cost predictability. We think an entry point of Rs50-55 would factor in these
risks and we recommend a switch to Adani Power (OW) among IPPs.
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