JSW Energy - Sensitively valued player - Elara Capital

Long term earnings visibility still remains hazy

Majority of the current capacity (~54%) being merchant based, and ~70% capacity exposed to vagaries of imported coal, EPS visibility still remains uncertain. Barmer's tariff approval though will eventually come through; timing of the same remains a concern. We have assumed the same to transpire in Q1 FY14.

ROEs might be subdued post FY14E

Management has been guiding for reducing CAPEX intensity on the face of ongoing fuel issues. We thus expect FY15E ROEs to start drifting lower on the back of increasing cash pile and our assumption of a tapering merchant tariff profile post general elections coupled with an arrest in falling international coal prices.

Treasury and mining mis-adventures have proved costly

Buyer's credit though a good concept, execution of the same met with steep depreciation in INR last fiscal which in turn dented FY12 profitability. The management has guided for bringing down this USD 333mn exposure to more manageable levels. The non profitable Coal mining venture in South Africa has been put on 'Care & Maintenance' for the time being.

Rich valuations could limit further upside

Trading at ~ 1.8x P/BV on the back of short lived ROE uptick, makes us wary of its sustenance given the open ended business model of the company which is sensitive to the vagaries of international coal prices and fluctuations in merchant tariffs

Relatively better comfort on the balance sheet

With ~ 1.5x D/E, JSW compares well with its private peers whose D/E levels are as high as 3-5x. Since the company has not guided for any fresh CAPEX immediately post the Rajwest project, we expect the D/E levels to further come down and end FY15E at little less than 1.0x.

Valuation

We have built in an ROE improvement till FY14E (~17%) from the current levels (~3%). We have employed an SOTP based valuation and have used DCF methodology for plant level valuation with COE (cost of equity) of 13%. We have assumed imported coal prices to consolidate at the current levels and have built in a decline in merchant market rates post FY14 general elections. We have worked out the sensitivity in JSW Energy's target price to changes in International coal prices, Merchant market rates, INR currency levels respectively.

Source : Equity Bulls

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