JSW Energy - ARA: Unhedged forex falls but sensitivity high; merchant/coal arbitrage benefits sustain - JM Financial

JSW Energy continues to benefit from current gap in low imported coal prices and a stable merchant power market. While INR depreciation inflates import costs, stable merchant prices in FY14 to support earnings.

- Significant operational improvement in all plants: Significant operational improvement was witnessed in FY13 as import based projects operated at 88-90% PLF while Barmer plant operated at 73% PLF, resulting in 38% YoY increase in generation.

Buyers credit reduces to US$300mn: JSW has reduced unhedged buyers credit (with accrued interest) to US$301mn in FY13 vs. US$417mn at the end of FY12, and booked at Rs. 54.39/US$ (Rs. 1.6bn). However, given INR fluctuation we expect future earnings to be volatile (10% change impacts P&L by Rs. 1.3bn).

Receivable position deteriorates slightly on Maharashtra receivables: JSW saw expansion in FY13 receivables as debtor days increased from 70 in FY12 to 75 in FY13 primarily on delayed payment from Maha Discom.

Merchant rates, coal prices stable: CERC forward curve data indicates strong merchant rates for next 8-12 months (Rs. 4.3-4.5/kWh) with Discoms tying up summer power/base load requirements. Thus with coal prices at $80-85/T the arbitrage benefit between merchant power and imported coal rates is expected to continue for next 2-3quarters, providing earnings visibility.

Cut TP/estimates on INR depreciation; Maintain BUY: We cut estimates by 13%/7% as we incorporate INR at Rs. 60/US$ vs. Rs. 53/US$. Given favourable dynamics in the short to medium term (election period, high merchant/low coal rates), JSW Energy remains our preferred Beta pick. Maintain BUY with revised Mar'14 TP of Rs. 55.

Key Risks: Under-recoveries in Barmer plant in case of delay in supply from captive lignite mines/sharp fall in merchant rates or rise in coal prices can also impact earnings estimates.

Source : Equity Bulls

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