Spike in power rates: Temporary respite for JSW Energy

The spike in merchant tariffs in September are seasonal and may be short-lived

Rising merchant or short-term tariffs have come as a breather for JSW Energy, which has been reeling under lack of sufficient long-term power purchase agreements (PPAs). But the gains, which led to a rally in share price in the past one month, might be temporary.

In the past four to five quarters, a weak merchant demand in Karnataka and Maharashtra, lower tariff rates, inadequate long-term PPAs for its Vijaynagar plant and rising international coal prices have hurt its profits. So, higher spot market prices at over Rs 5/kWh compared with Rs 2.4/kWh in FY17 and at Rs 3/kWh for the April-August period bode well for its near-term revenue and profits.

However, according to analysts, the spike in power rates is led by temporary and seasonal factors. The decline in hydro (down 12 per cent year-on-year, in August) and nuclear (down 36 per cent y-o-y) power generation has been the primary reason, Kotak Institutional Equities’ data showed.

Analysts feel the demand-supply equation still remains unfavourable and, hence, the higher prices may not sustain.

A short-term spike in merchant tariffs may lift its September quarter results, while domestic coal blending, if increased by JSW, can boost profitability further.

The bigger trigger will be JSW’s ability to secure a long-term PPA with Karnataka. Some analysts remain optimistic, as the state has a PPA of 8.8 Gw (gigawatt) against an FY17 peak demand of 10.2 Gw. To plug this deficit, Karnataka needs to open PPA bids, believe analysts at Ambit Capital, who see the Vijaynagar plant as the best bet due to its fixed cost of 71 paise per unit, versus recently commissioned plants having fixed costs of Rs 1.5-2.5 per unit. In the interim, short-term contract bids floated by Karnataka for 500 Mw (megawatt) supplies during the October 2017 to May 2018 period are a dampener. Last year, JSW had won a contract to supply 650 Mw at Rs 4.18 per unit, of the 1,200 Mw bids floated for supplies during December 2016-May 2017. 

Not only is the requirement for the current year lower, but competition is also higher, since this year’s tender does not mandate power supplies from the southern region. Analysts at Antique Stock Broking consider this to be negative for JSW, as tariffs could be lower at Rs 3.5-4 per unit.

Also, given its plans to make electric vehicles, Rupesh Sankhe at Reliance Securities, says JSW has no expertise to compete with the established auto players, which can be negative for minority shareholders and may warrant a de-rating of the stock.