JSW Energy - Limited Growth Visibility; Downgrade to "SELL" - Karvy

JSW Energy (JSWEL) has outperformed the Sensex by 42% and 55% to the Power Index over 12 months due to decline in global coal prices by 24%. However, JSWEL continues to remain exposed to imported spot market and merchant power rates, resulting in earnings volatility. JSWEL has benefited from drop in global coal prices, which is offset by a decline in INR against the Greenback.

No Near-term Capacity Addition: JSWEL has 2.6GW of operating capacity with 8.5GW of capacity under development stages with no progress that would result in subdued earnings. The next major rise in capacity will not take place until FY16-17E, when we expect addition of 300MW from West Bengal-I & Phase-I of 1,320MW from Ratnagiri-II.

Approvals for tariff and lignite mining still pending, Lower Under-Recoveries in Barmer Plant: Barmer incurred Rs. 270 mn loss in FY12, as the rise in project cost has not been fully approved by the RERC (regulator). The current approved tariff of Rs3.63/unit for Units 1-4 and Rs3.86/unit for Units 5-8 will be sufficient for the project to break even, as per management Kapurdi mine will take another 18-24 months to commence.

Pending Renegotiation of PPA for Ratnagiri Projects: JSWEL has signed PPA with MSEDCL for 300MW at average Rs. 3.1/kWh, but subsequently JSWEL's mine in Indonesia is cancelled resulting in higher fuel costs. Meanwhile, PPA renegotiations are pending with the RERC for a long time. Earlier, JSWEL approached the MERC after its dispute with MSEDCL over revision of tariff for its 300MW unit at Jaigad (Ratnagiri). It said that Indonesia had terminated mining license of its coal supplier, which it argued was a "force majeure" situation. However, the MERC have rejected JSWEL's plea to revise power tariffs.

Key Upside Risks:

- Higher-than-expected merchant power prices,
- Further correction in coal, and
- Appreciation in INR.

Outlook & Valuation

At the CMP, the stock trades at 13.3x P/E, 9.3x EV/EBITDA & 1.6x FY14E P/B with 12.5% RoE of its FY14E. We downgrade our recommendation on JSWEL to "SELL" from "HOLD", as fuel security is a key issue for the Company, as it has to sign long-term coal contracts to insulate itself from volatility in the fuel prices. Again, JSWEL has high exposure to merchant power leading to earnings volatility, which is the chief area of concern.

Source : Equity Bulls

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