Recently, JSW Energy’s coal acquisition deal with CIC Energy could not go through. The deal could have given long-term fuel security to the company, but investors’ worries are more immediate in nature.
The company is open ended on both sides, tragically susceptible to coal prices, which are going up; and merchant power prices, which are on a downtrend. Investors and buyers have started to view it more as a trading stock than a power sector stock that brings the promise of fixed returns. It is no surprise that the stock price of the company has been trading at Rs 70-80 per share, and has not touched its IPO price in the last five months.
The reason is that increasing thermal coal prices, which had touched $130 a tonne, are now at $119 per tonne. “I don’t think the stock will go back to its IPO price unless international coal prices come down to the $80-90 range. But even then, we will only upgrade the stock to hold and not an aggressive buy,” said a power sector analyst at a brokerage.
This bearish outlook on the company is due to JSW's model, where it sources its entire coal requirement from the spot market, leaving it vulnerable to price volatility. Its average cost of producing power went up by 36 per cent last year, to Rs 3 a unit.
Broken threads
JSW had signed a long-term coal sourcing agreement with an Indonesian coal supplier for its 1,200-Mw Ratnagiri power plant, which has three units up and running. The agreement, however, was terminated after the supplier did a force majeure, and suspended supplies. This, too, left the company at the mercy of the spot market.
Moreover, during the IPO, Sajjan Jindal, vice-chairman and managing director, JSW Group, had said that JSW Steel would transfer its Mozambique coal mine to JSW Energy, as studies showed that the mine had 80 per cent thermal coal. The transfer is yet to happen and the two boards haven’t even taken up the matter so far. At a recent press conference, the company said it was looking to secure fuel supplies from ‘outside’ the group companies.
JSW’s existing captive coal mines, too, have not been a help. The company’s South African mines also suffered from low coal production. Last quarter, they produced less than the 75,000 tonnes required for a shipment. So, it bought expensive spot coal from the market.
“This, coupled with delays in commissioning its lignite mines, will translate into higher dependence on spot coal purchases during 2011-12. We expect spot purchases to be the highest in 2011-12 at 5.28 million tonnes,” said Hitul Gutka and Vinod Nair, in a report by PINC Research.
Acquisition plans
A recent report by JPMorgan said some of JSW Energy’s coal worries would continue to persist through 2013-14. “We would be more positive on acquisition of an operating mine at reasonable valuations or a long-term agreement to source imported coal,” the report said.
A coal mine acquisition that can supply coal immediately, however, is not easy. A number of mines that are now up for sale in Australia are looking at companies that can invest in the development of the mine as well.
Some analysts feel that the company’s balance sheet, which had Rs 975 crore as cash by the end of the financial year, may not be able to take big buyout bets. The company, which is expected to commission two units at Barmer and two at Ratnagiri this year, will see huge spends in capacity building.
“JSW Energy has a debt to equity ratio of 1.7 currently and if it raises more debt for an acquisition, it can go as high as two, which is the red zone,” said a stock broking researcher.
The company is trying to make minor amends. It is looking to increase imports by as much as 3.5-4.5 million tonnes from South Africa and Indonesia during the year, besides reducing fuel costs. It is also planning to reduce exposure towards volatile merchant power. Last year, it sold 67 per cent of its volumes on a merchant basis. It has already made arrangements to sell 25 per cent of this power through long-term contracts.
