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Power July 24, 2014

JSW Energy

Bloomberg: JSW IN Reuters: JSWE.BO

SELL

Institutional Equities

India Research

RESULT REVIEW

Recommendation

CMP: Rs82

Target Price: Rs48

Previous Target Price Rs46

Downside (%) -41%

Stock Information Market Cap. (Rs bn / US$ mn) 135/2244

52-week High/Low (Rs) 87/34

3m ADV (Rs mn /US$ mn) 72/1.2

Beta 1.8

Sensex/ Nifty 26147/7796

Share outstanding (mn) 1,640

Stock Performance (%) 1M 3M 12M YTD

Absolute 13.9 40.2 86.4 45.6

Rel. to Sensex 9.1 22.6 44.7 17.9

Performance

Source: Bloomberg

Earnings Revision

(%) FY15E FY16E

Sales 5.7% 4.6 %

EBITDA 3.2% 4.7%

PAT 9.3% 6.8%

Source: Karvy Institutional Research

Analyst Contact Rupesh Sankhe

022 6184 4315

[email protected]

30 40 50 60 70 80 90

15,500 17,500 19,500 21,500 23,500 25,500 27,500

Jul-

13

Sep

-13

Oct

-13

No

v-1

3

Dec

-13

Feb

-14

Mar

-14

Ap

r-1

4

Jun

-14

Jul-

14

Sensex (LHS) JSW Energy (RHS)

Higher Profits on the back of higher PLF–

Limited Growth Visibility; Maintain SELL

JSW Energy’s net profit increased by 51.9% YoY to Rs. 3.25 bn in Q1FY15 – vs.

our expectation of Rs. 2.9 bn –primarily due to higher PLF of 92% in Barmer

during the quarter as against 73% in Q1FY14. Higher PLF in Barmer is

primarily due to lignite availability & higher demand by the SEBs.

Raj West Power (RWPL) plant had undertaken a shutdown of the 1,040MW

(8x135MW) power station at Barmer for around one month in Feb due to

non-availability of lignite under the fuel supply agreement. Barmer PLF was

34% in Q4FY14. The Company generated 50.0 bn units (BUs) in Q1FY15 vs.

50.1 BUs in Q1FY14, registering de-growth of 1.7% on YoY basis.

Its EBITDA de-grew 1.8% YoY to Rs. 9.0 bn in Q1FY15 from Rs. 9.2 bn in

Q1FY14 however improved by 31% on sequential basis. The fuel cost stood at

Rs. 2.35 per unit in Q1FY15 vs. Rs 2.7 per unit due to fall in the prices of

imported coal.

Key Development:

240 MW power project at Kutehr, Himachal Pradesh-land acquisition

process for the project is in progress with acquisition of all the

requisite environmental clearances.

As far as Barmer Lignite Mining is concerned, the Ministry of

Environment and Forest approval is awaited for enhancement of

mining capacity at Kapurdi to 7 MTPA pursuant to completion of all

due processes

Outlook & Valuation At the CMP, the stock trades at 12.5x P/E, 7.3x EV/EBITDA & 1.7x FY16E

P/B with 14% RoE in FY16E. On account of declining earnings and

vulnerability to forex and imported coal prices, likely lower merchant rates

post FY16 due to integration of Southern grids to national grid, we

maintain our “SELL” recommendation on the stock with revised target

price of Rs. 48 per share (Earlier Rs 46), implying 41% downside from the

CMP with option value of Rs. 4.4 per share if Udupi deal happens.

Key Financials

Y/E Mar (Rsmn) 2012 2013 2014 2015E 2016E

Net Sales 61,188 89,343 87,054 96,721 103,256

Op. Profits 14,478 27,932 32,514 28,293 29,623

Adjusted Net Profit 3,313 11,119 11,490 9,504 10,858

YoY Gr. (%) (54.3) 235.6 3.3 (17.3) 14.2

EPS (Rs) 1.0 5.5 4.6 5.8 6.6

RoE (%) 5.8 18.7 18.0 13.7 14.0

ROCE (%) 7.2 15.7 17.0 13.7 14.2

PE (x) 80.0 15.1 18.0 14.3 12.5

P/B (x) 2.4 2.2 2.1 1.9 1.7

Source: Company, Karvy Institutional Research

2

July 24, 2014

JSW Energy

Results Review Operational Performance Total Generation: The Company generated 50.0 bn units (BUs) in Q1FY15 vs.

50.9 BUs in Q1FY14, registering de-growth of 1.7% on YoY basis.

Segmental Sales: Its merchant volume recorded at 2,694 MUs, while long-term

PPA stood at 2,911. ST trading comprised of 53% of total volume in Q1FY15.

Power Generation: JSW Energy’s net volume sent out declined 1.7% to 5,006 mn

units (MUs) in Q1FY15 vs. 5,097 MUs in Q1FY14 as against our expectations of 8%

de-growth in generation. Higher generation is driven by improved PLF of 92% in

Q1FY15 vs. 73% in Q1FY14. Vijayanagar units were at a lower PLF of 98% in

Q1FY15 vs. 102% in Q1FY14, while the PLFs for Ratnagiri stood at 68% in Q1FY15

(vs. 83% in Q4FY13) & Barmer plant’s PLF at 92% in Q1FY15 (vs. 73% in Q1FY14).

Exhibit 1: Operational Performance: Net Generation (in MT)

Location Q1FY15 Q1FY14

Vijayanagar 1,702 1,758

Ratnagiri 1,618 1,984

Barmer 1,687 1,355

Total 5,006 5,097


Exhibit 2: Quarterly Performance

Rs Mn Q1FY14 Q4FY14 Q1FY15 QoQ (%) YoY (%)

Net Sales 24,720 20,583 25,583 24.3 3.5

Operating Costs 15,492 13,670 16,521 20.9 6.6

EBIDTA 9,228 6,913 9,062 31.1 -1.8

EBIDTA Margin (%) 37.3 33.6 35.4 184 -191

Other Income 453 548 419 -23.5 -7.6

Interest 2,747 3,021 2,931 -3.0 6.7

Depreciation 2,008 1,995 1,948 -2.3 -3.0

Profit Before Tax 4,926 2,445 4,601 88.2 -6.6

Tax 870 643 1,248 94.1 43.4

Tax Rate (%) 17.7 26.3 27.1 3.1 9.0

Adjusted PAT 4,056 1,802 3,353 86.1 -17.3

Extraordinary Income 1,872 47 90 91.3 -95.2

Reported PAT 2,143 1,755 3,255 85.4 51.9


3

July 24, 2014

JSW Energy

Valuation & Outlook: Capacity growth tapers off after F2013: We expect JSWEL the next

major increase in capacity will not take place next 4-5 yrs ,as a result, we

expect companies such as Adani Power, Reliance Power, Lanco and JSPL

to be much larger than JSWEL at the end of FY2014. In addition, the

visibility on pipeline projects such as Ratnagiri II (3,200 MW), West Bengal

II (1,300 MW) and Jharkhand (1,620 MW) is low, as these projects are still

awaiting basic requirements such as land and environmental clearances.

Earnings Volatility Due to High Exposure to Merchant

Power: Out of JSWEL’s total capacity of 3,140MW, 55% would be under

the merchant route, while Adani’s at 20-22%, CESC’s at 10%, Tata Power’s

at 2%, and NTPC’s at 1%. We are of the opinion that the merchant rates

would soften further on the back of incremental capacity, and back-out of

the SEBs.

Excessive Dependence on Spot Imported Coal: A major chunk

of JSWEL's FY14 capacity (65% including for Raj West) would operate on

imported coal. Given the huge demand from India & China, the spot coal

prices are likely to be lower from current levels. We believe high fuel cost

dent the IRR of the projects.

At the CMP, the stock trades at 12.5x P/E, 6.7x EV/EBITDA & 1.7x FY16E P/B with

14% RoE in FY16E. On account of declining earnings and vulnerability to forex

and imported coal prices, likely lower merchant rates post FY16 due to integration

of Southern grids to national grid, we maintain our “SELL” recommendation on

the stock with revised target price of Rs. 48 per share, implying 41% downside

from the CMP with a positive option value of Rs. 4.4 per share if acquisition of

Udupi plant happens at a quoted price.

Exhibit 3: JSW Energy Valuation

Projects Rs bn Earlier Rs/share Revised Comments

Vijayanagar-I (260MW) 11.0 6.7 6.7

Vijayanagar-II (600MW) 20.2 12.0 12.3 Maintain PLF to 88%.

Raj West-I (1,080MW) 9.9 4.6 6.0 PLF assumption from 78% to 81%

Ratnagiri (1,200MW) 22.2 12.8 13.5 Maintain PLF to 81%, Lower Imported Coal.

Transmission 0.5 0.3 0.3 Jaigad- Koyna, Karad Projects

Equity in planned projects 2.0 1.2 1.2 Investments in Kuther hydro

Cash & cash equivalent 14 8.3 8.3

Total 75 46 48


4

July 24, 2014

JSW Energy

Financials Exhibit 4: Income Statement

Y/E Mar (Rsmn) 2012 2013 2014 2015E 2016E

Revenues 61,188 89,343 87,054 96,721 103,256

Growth (%) 46.3 46.0 -2.5 11.1 6.7

Operating Profit 14,478 27,932 32,514 28,293 29,623

Other Income 1,466 2,134 2,022 2,164 2,207

EBITDA 15,944 30,066 34,536 30,456 31,830

Growth (%) 0.6 88.57 14.87 -11.81 4.51

Depreciation & Amortization 5,033 6,615 8,100 7,962 7,450

EBIT 10,911 23,451 26,436 22,494 24,380

Interest Charges (Net) 7,172 9,628 12,059 10,673 10,720

PBT (Before E/o items) 3,738 13,823 14,377 11,821 13,660

Tax provision 419 2,733 2,836 2,317 2,732

Minority interest 6 (29) 51 66 70

Pre-exceptional PAT 3,313 11,119 11,490 9,504 10,858

Extra-ordinary items (1,613) (2,083) (3,943) 0 0

Net Profit 1,701 9,036 7,547 9,504 10,858

Growth (%) (76.6) 431.40% -16.48% 25.92% 14.25%

Basic EPS (Rs) 1.0 5.5 4.6 5.79 6.6

Growth (%) (76.6) 431.40% -16.48% 25.92% 14.25%


Exhibit 5: Balance Sheet

Y/E Mar (Rsmn) 2012 2013 2014 2015E 2016E

Equity Share Capital 16,401 16,401 16,401 16,401 16,401

Reserves & Surplus 40,600 45,637 49,311 56,933 65,702

Shareholders' Funds 57,001 62,038 65,712 73,333 82,102

Minorities Interest 500 452 503 697 901

Total Debt 87,473 88,851 89,651 93,891 89,600

Deferred Tax liability 1,292 1,524 1,933 1,933 1,933

Capital Employed 146,265 152,865 157,799 169,855 174,536

Fixed Assets 146,446 149,191 142,493 152,048 158,093

Cash & cash eq. 6,686 3,990 5,675 11,211 12,130

Net current assets (11,837) (9,866) 755 (2,281) (4,564)

Investments 4,971 9,550 8,877 8,877 8,877

Total Assets 146,265 152,865 157,799 169,855 174,536


5

July 24, 2014

JSW Energy

Exhibit 6: Cash Flow Statement

Y/E Mar (Rsmn) 2012 2013 2014 2015E 2016E

Pre-tax profit 3,738 13,823 14,377 11,821 13,660

Depreciation 5,033 6,615 8,100 7,962 7,450

Total tax paid (419) (2,733) (2,836) (2,317) (2,732)

Chg in working capital 11,179 (1,972) (10,620) 3,036 2,282

Other items (1,619) (2,053) (3,994) (66) (70)

Cash from oper. (a) 17,912 13,680 5,026 20,436 20,591

Capital expenditure (9,901) (9,361) (1,401) (17,517) (13,495)

Change in Investment (129) (4,579) 673 - -

Cash from inv. (b) (10,030) (13,940) (728) (17,517) (13,495)

Free cash flow (a+b) 7,882 (260) 4,298 2,918 7,096

Equity raised/(repaid) (1,138) (2,261) (2,421) (430) (637)

Debt raised/(repaid) (8,903) 1,378 800 4,240 (4,291)

Change in Minority Int (224) (48) 51 194 203

Dividend (incl. tax) (327) (1,739) (1,452) (1,452) (1,452)

Other items (271) 233 409 0 0

Cash from fin. (c) (10,862) (2,436) (2,613) 2,552 (6,177)

Net chg in cash (a+b+c) (2,980) (2,696) 1,685 5,470 919


Exhibit 7: Key Ratios

Y/E Mar (Rsmn) 2012 2013 2014 2015E 2016E

OPM (%) 23.7 31.3 37.3 29.3 28.7

Net Margin (%) 5.4 12.4 13.2 9.8 10.5

Dividend Yield (%) 0.2 1.1 0.9 0.9 0.9

Net Debt/Equity (x) 1.4 1.4 1.3 1.1 0.9

ROCE (%) 7.2 15.7 17.0 13.7 14.2

RONW (%) 5.8 18.7 18.0 13.7 14.0

EV/Sales (x) 3.5 2.5 2.5 2.3 2.1

EV/EBITDA (x) 13.6 7.3 6.4 7.2 6.7

PE (x) 80.0 15.1 18.0 14.3 12.5

P/B (x) 2.4 2.2 2.1 1.9 1.7


Institutional Equities Team Rahul Sharma

Head – Institutional Equities /

Research / Pharma +91-22 61844310 [email protected]

Gurdarshan Singh Kharbanda Head - Sales-Trading +91-22 61844368/69 [email protected]

INSTITUTIONAL RESEARCH

Analysts Industry / Sector Desk Phone Email ID

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Rajesh Kumar Ravi Cement/ Logistics/ Paints +91-22 61844313 [email protected]

Rupesh Sankhe Power/Capital Goods +91-22 61844315 [email protected]

Asutosh Mishra Banking & Finance +91-22-6184 4329

Varun Chakri Research Associate +91 22 61844326 [email protected]

Vinesh Vala Research Associate +91 22 61844325 [email protected]

INSTITUTIONAL SALES

Celine Dsouza Sales +91 22 61844341 [email protected]

Edelbert Dcosta Sales +91 22 61844344 [email protected]

INSTITUTIONAL SALES TRADING & DEALING

Aashish Parekh Institutional Sales/Trading/ Dealing +91-22 61844361 [email protected]

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Pratik Sanghvi Institutional Dealing +91-22 61844366 /67 [email protected]

For further enquiries please contact:

[email protected]

Tel: +91-22-6184 4300

Disclosures Appendix

Analyst certification

The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed

herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of

his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views

contained in this research report.

Disclaimer

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contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for

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loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all

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Stock Ratings Absolute Returns Buy : > 15% Hold : 5 - 15% Sell : < 5%

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