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JSW Energy (JSW)
Utilities
Wager falls through. With both imported coal and merchant tariffs headed in an
unfavorable direction, JSW Energy’s profitability has taken a hit and we do not foresee
significant improvement in the operating environment given the overall macro scenario
of coal availibility and the financial health of State Electricity Boards. We maintain our
cautious stance though and upgrade the stock to REDUCE (from SELL previously) noting
sharp under-performance. We have revised our target price to Rs60 (from Rs70
previously).
Leverage to spot markets disconcerting, merchant model under pressure
We maintain our cautious stance on JSW Energy despite the sharp correction of 22% in stock
price over the past three months. Our investment thesis is driven by JSW Energy’s excessive
leverage to spot markets with an estimated dependence of ~4.3 mtpa on spot purchase of coal
(see Exhibit 2) coupled with 60% of power likely to be sold in the short-term market.
With State Electricity Boards (SEBs) already showing a lack of appetite for purchase of expensive
power, utilization rates for imported coal-based plants have come under pressure, as was evident
in 1QFY12 with Vijaynagar units clocking a PLF of 80% (against historical PLFs in excess of 90%).
Further, continued pressure on merchant prices and a corresponding surge in prices of imported
coal have driven down the profitability of merchant capacities based on imported coal. We note
that average bilateral prices came down to Rs4.35/kwh (-25% yoy) in 1QFY12 from Rs5.83/kwh in
1QFY11. The vulnerability of earnings to the spot market was reflected in 1QFY12 numbers with
net income declining by 54% yoy despite a near doubling of operational capacity during the
period.
First phase of capacity addition nearing completion; limited visibility beyond
We note that beyond the current portfolio of projects under construction aggregating to 3,140
MW (of which 2,030 MW has already been either commissioned or synchronized), there is limited
visibility on the development portfolio of 9.5 GW. We further highlight that JSW Energy has
deployed just 1% (as of March 2011) of total project cost of Rs404 bn for its development
portfolio (see Exhibit 5), signaling limited visibility beyond FY2012E.
Upgrade to REDUCE noting recent underperformance
We upgrade JSW Energy to REDUCE (from SELL previously) noting a sharp correction in stock price
though we highlight the susceptibility of earnings to (1) rising prices of coal and (2) moderating
short-term tariffs. We have revised our target price to Rs60/share (previously Rs70/share) as we
factor a higher risk of merchant dependence, lower utilization rates and current prices of imported
coal. We have revised our EPS estimate to Rs4.8/share in FY2012E (previously Rs6.1/share) and to
Rs4.7/share in FY2013E (previously Rs5.1/share) as we adjust for higher auxiliary consumption for
Vijayanagar and Ratnagiri units.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
JSW Energy (JSW)
Utilities
Wager falls through. With both imported coal and merchant tariffs headed in an
unfavorable direction, JSW Energy’s profitability has taken a hit and we do not foresee
significant improvement in the operating environment given the overall macro scenario
of coal availibility and the financial health of State Electricity Boards. We maintain our
cautious stance though and upgrade the stock to REDUCE (from SELL previously) noting
sharp under-performance. We have revised our target price to Rs60 (from Rs70
previously).
Leverage to spot markets disconcerting, merchant model under pressure
We maintain our cautious stance on JSW Energy despite the sharp correction of 22% in stock
price over the past three months. Our investment thesis is driven by JSW Energy’s excessive
leverage to spot markets with an estimated dependence of ~4.3 mtpa on spot purchase of coal
(see Exhibit 2) coupled with 60% of power likely to be sold in the short-term market.
With State Electricity Boards (SEBs) already showing a lack of appetite for purchase of expensive
power, utilization rates for imported coal-based plants have come under pressure, as was evident
in 1QFY12 with Vijaynagar units clocking a PLF of 80% (against historical PLFs in excess of 90%).
Further, continued pressure on merchant prices and a corresponding surge in prices of imported
coal have driven down the profitability of merchant capacities based on imported coal. We note
that average bilateral prices came down to Rs4.35/kwh (-25% yoy) in 1QFY12 from Rs5.83/kwh in
1QFY11. The vulnerability of earnings to the spot market was reflected in 1QFY12 numbers with
net income declining by 54% yoy despite a near doubling of operational capacity during the
period.
First phase of capacity addition nearing completion; limited visibility beyond
We note that beyond the current portfolio of projects under construction aggregating to 3,140
MW (of which 2,030 MW has already been either commissioned or synchronized), there is limited
visibility on the development portfolio of 9.5 GW. We further highlight that JSW Energy has
deployed just 1% (as of March 2011) of total project cost of Rs404 bn for its development
portfolio (see Exhibit 5), signaling limited visibility beyond FY2012E.
Upgrade to REDUCE noting recent underperformance
We upgrade JSW Energy to REDUCE (from SELL previously) noting a sharp correction in stock price
though we highlight the susceptibility of earnings to (1) rising prices of coal and (2) moderating
short-term tariffs. We have revised our target price to Rs60/share (previously Rs70/share) as we
factor a higher risk of merchant dependence, lower utilization rates and current prices of imported
coal. We have revised our EPS estimate to Rs4.8/share in FY2012E (previously Rs6.1/share) and to
Rs4.7/share in FY2013E (previously Rs5.1/share) as we adjust for higher auxiliary consumption for
Vijayanagar and Ratnagiri units.
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