JSW Energy stock prices in the concerns

Analysts optimistic on FY14 prospects on rise in capacity and higher rates for supply

After the Budget announcement of a rise in the import duty on coal, JSW Energy’s share price fell sharply. The Street was worried about the likely impact on earnings.

This was because almost all its coal-fired power generation capacity continues to use imports as feedstock. However, as merchant power rates recently rose and are likely to remain firm, analysts believe this should cover the increase in costs. Hence, there is limited downside for the stock, trading at reasonable valuations of one time the estimated book value. Additionally, JSW will benefit from the increase in capacity, which will drive volumes.

“At the current level, there is nothing to lose. Also, the impact of higher import duty will be more than compensated by the possibility of higher short-term power rates,” says Bhargav Buddhadev, who tracks the company at Ambit Capital.

About 70 per cent of the company’s coal-based power generation capacity is exposed to merchant rates. The good news is that merchant power rates moved up recently and are expected to do so again because of summer season demand and due to general elections next year. The company’s record of successfully sourcing imported coal for its plants provides comfort, as availability in the country has been a key cause of concern.

In the third quarter, average realisation moved up to Rs 4.7 a unit as compared to Rs 4.5 a unit in the second quarter. Things have also improved operationally. With the commissioning of the Ratnagiri and Rajwest power units, JSW’s capacity has increased to about 2,600 Mw, leading to more revenue. Also, lower international coal prices and higher plant utilisation at 91.3 per cent in the third quarter led to gains. This was reflected in operating margins improving by 761 basis points sequentially in the December quarter.

  With the rise in capacity and higher rates, analysts are expecting a year-on-year growth of 30-50 per cent in FY14 earnings and 20-25 per cent in FY15. Earnings per share are expected to move from Rs 4.7 in FY13 to Rs 8.4 in FY15. Among the key risks to these estimates are the international coal price and exchange rate, which could impact performance. The other worry is about possible higher supplies once the southern Indian market gets connected to the national grid, given JSW’s large exposure to the former region.

However, some analysts believe the downside risk on this front is limited. “I think the supply will increase but prices might not fall, given the deficit in the region and supply constraints in the northern market,” says Rabindra Nath Nayak, analyst, SBICAP Securities.

Analysts also believe the company should be able, by that time, to sign long-term power purchase agreements and hedge the risk.