Sell JSW Energy - PINC Initiating Coverage

JSW Energy plans to enhance its capacity to 11.4GW by FY16. However, visibility remains high for only 1.7GW, which is expected to commission by FY12. High exposure to the short term market, spot coal purchases and delays in capacity addition are key risks to the company's earnings. Initiate coverage will SELL recommendation.

Expect 13% downside; Initiate with SELL recommendation

Although, JSWEL is one of the fastest-growing power companies, we believe its high exposure to spot market only increases earnings sensitivity. Robust 66% earnings CAGR over FY10-12E, due to higher operational capacity, should allow the stock to trade at a premium in the near future.

We expect the premium to contract as: 1) capacity addition slows; 2) short-term rates soften; and 3) fuel prices increase. Decline in profitability and higher interest outgo will contract its RoE going forward. Hence, further upside for the stock seems limited, in our view.

We value the company on FCFE to arrive at our target price of Rs117, implying potential downside of 13%. We initiate coverage with a SELL recommendation.

Source : Equity Bulls

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