JSW Energy looks at better show ahead

Despite a dismal March quarter, JSW Energy’s prospects are positive due to expectations of a better revenue mix, stability in merchant power rates, the emerging clarity on fuel availability and higher cash flows. Current valuations, too, provide comfort, with the stock trading at nine times its FY15 estimated earnings and 1.2 times its book value.

“JSW Energy is among the better-placed private sector IPPs (independent power producers), as it has no fixed-priced PPAs (power purchase agreements); the lowest quartile fixed cost of Rs 4.5 crore a Mw due to lower capital costs, compared with Rs 7 crore a Mw for peers; significantly depreciated plants; and a healthy balance sheet, with a net debt-to-equity ratio of 1.35. Additionally, dividend yield of four per cent and a free cash flow yield of 10 per cent means limited downside from the current market price,” says Bhavin Vithlani, who tracks the company at Axis Capital

For the quarter ended March, the company reported a 10.5 per cent decline in revenue at Rs 2,058 crore, largely due to the shutdown of a 1,080-Mw power plant in Barmer (Raj West Power) for about a month, owing to the unavailability of lignite. Also, generation (60 per cent plant load factor, or PLF) at the 1,200-Mw Ratnagiri power plant was lower because of lower demand from state electricity boards. However, merchant power realisations were stable— about Rs 4.5 a unit.

Merchant power accounts for about 60 per cent of sales and the rate for these sales has a major impact on realisations and earnings.

Analysts feel in case there is no significant capacity addition in the country, current rates will sustain in the coming months. The management, too, expects the rates to remain stable at Rs 4.25-4.4 a unit in the first half of FY15. This, along with the company’s efforts to improve generation in its existing power plants, could yield decent results, especially in terms of cash flows, which will improve in the coming months. This is possible, as the entire capacity of the Raj West project (1,080 Mw) is now operational, following the coal ministry’s recent clearance for Kapurdi (Rajasthan) mine expansion—-from 3.75 tonnes (mt) a year to seven mt a year.

“The public hearing for the environment clearance is scheduled for June 14. The management expects a final clearance in FY15 and has guided for 75 per cent PLF at the Barmer plant,” said an analyst at a domestic brokerage.

In FY14, this plant recorded a PLF of 69 per cent. With the current rate of Rs 3.74 and an expected PLF of 75 per cent, this facility can record 12-14 per cent return on equity, which will be crucial for its earnings and cash flows in the coming years. Further, the company also aims to reduce its exposure to merchant power, as it plans for case-I bidding in Karnataka and, subsequently, in Andhra Pradesh. Through this, the company will be able to pass the costs and manage volatility in spot coal prices and the fluctuation in the rupee, which hits its earnings.

The impact of generation losses was seen in the March quarter, as the company wasn’t able to adequately cover the interest cost and depreciation. It reported a 48per cent decline in net profit at Rs 174 crore. The result is considered to be a one-off, as some issues have already been resolved. It is expected the company’s financial performance will see a recovery through the next few quarters.