STOCK ANALYSIS: JSW Energy

With the commissioning of the first unit (300 mw) out of the total 1200mw Ratnagiri project (Maharashtra) in July 2010, JSW Energy’s installed capacity will jump 30 per cent to almost 1300mw.

The Sajjan Jindal group-owned company is well on course to achieve 3410 mw capacity by FY14, with full commissioning of Ratnagiri (1200mw) and Barmer (1080mw) by FY12 itself.  Besides, 8250mw worth of projects are under various stages of development, which will help JEL achieve a project size of about 11500mw by FY16.

Analysts are positive and confident about the company’s capability of achieving the said project targets due to its strong execution track record, financial strength and huge base of operational capacity (1000mw) unlike many other new private entrants. They estimate strong sales and profit CAGR of 54 per cent and 48 per cent respectively between FY10-13E. In FY11, average sales and profits are likely to almost double on a y-o-y basis to Rs 5,530 crore and Rs 1,291 crore, respectively due to phased commissioning of Ratnagiri and Barmer projects. This is over and above 28 per cent and 169 per cent jump in sales and profit at Rs 2,355 crore and Rs 745.5 crore, respectively in FY10 mainly due to a lower base.

The most interesting argument in favour of JEL is the fact that it is also one of the best plays on India’s currently buoyant merchant power story. In FY10, around 70 per cent of the power generated by JEL was sold on merchant basis at Rs 4.5 per unit. Going ahead, though this high share is expected to come down to less than around 50 per cent by FY14, the company is well placed to reap benefits of high merchant power rates in India, thanks to robust power demand on account of strong economic growth and supply lagging behind. The front loaded merchant capacities are likely to benefit the company due to high merchant tariff over the next 2-3years, say analysts.

However, there are risks to being bullish about the company.

Beyond FY14, merchant power rates are going to soften as robust expansion of power plans start getting commissioned. Around 1, 00,000mw is expected to come up by FY14, adding to the current India’s installed capacity of 1, 55,000 mw and thus putting pressure on short-term rates.  JEL witnessed about halving of merchant power rate at Rs 4.5 in FY10. Analysts estimate that spot tariff would converge with regulated tariff of Rs 2.5-3.5 per unit.

Secondly, the company is exposed to fuel availability and its cost. It is dependent on 10 million tonnes per annum (MTPA) imported coal for 3410mw. While more than 60 per cent of the coal will be bought on spot basis, the rest has been tied up on a long-term basis. Also, till the time its lignite mines start operations, which will take 2-3 years, it will need additional 8.5MTPA of coal. By using more of imported coal, JEL is exposed to pricing and exchange risk that could have serious impact on its financial performance, as there is no benefit of pass-through in merchant based projects.

Thus, investors need to watch out for this critical trigger as to how the company reduces its excessive dependence on imported coal. JEL is trying to resolve the issue though slowly. In April, it acquired about 50 per cent stake in South African Coal Mining Holding Ltd (SACMH) having total reserves of 50 million tones. Further, Indian Ocean Mining Ltd, South Africa (IOM) and Osho Venture FZCO, Dubai is now working together with JSW Energy to give JSW access to get 70 per cent of Osho and IOM, which is subject to due diligence. Lastly, the company has been using Chinese equipments for projects under construction (3410mw). There are questions raised about the quality and efficiency of Chinese equipments.

At Rs 125, the stock has given a return of 25 per cent in the last six months over its issue price of Rs 100 since its listing in January 2010. It trades at 10 times and 3.5 times FY12 estimated earnings and book value, respectively. With various positive triggers such as timely commissioning of capacities and announcement of acquisition of coal mines, analysts are nevertheless positive on the company. They have estimated an average one year target price at Rs 163, implying an upside of over 30 per cent.