Low demand, high costs key worries for JSW Energy

Low demand on one hand and higher fuel and fixed expenses like interest costs on the other hand, were responsible for JSW Energy’s net profit falling 34.5 per cent year-on-year in the December quarter to Rs 203.3 crore — well below consensus expectations of Rs 265 crore. This should also possibly have its spill-over effect on the earnings expectations for JSW Energy for FY14 and thus, possible earnings downgrades in the coming days.

Its share price, which fell nearly five per cent in intra-day trade on Thursday, closed with a one per cent loss at Rs 43.8. Before the results, analysts were expecting the company to earn an earnings per share (EPS) of Rs 7.6 in FY14. However, analysts now believe there is scope of earnings downgrades and which is one reason that the stock valuations could also get impacted. Currently, the stock is trading at 0.9 time its current book value and six times its FY14 estimated EPS. Though the valuations are lower, given the uncertainty and that analysts are expecting JSW Energy’s earnings to fall over the next two years, investors should be cautious.

Low output
JSW Energy has operational power generation capacity of 3,140 Mw. However, a large part of this capacity was underutilised in Q3 given that the plant load factor (PLF) was recorded at just 64 per cent. During Q3, generation fell by 15.42 per cent to 4,034 million units versus 4,770 million units in the year-ago period. This was largely on account of lower off-take by the distribution licensees and non-availability of certain power capacity of JSW Energy, which collectively had an impact on the company’s revenues that fell by 9.1 per cent year-on-year in Q3 to Rs 2,151 crore. Thankfully, realisations were better, which partly helped revenues as well as offset higher fuel cost, which was up two per cent to Rs 1,048 crore in Q3. Nevertheless, higher fuel costs impacted operating profit, which fell by 4.5 per cent year-on-year.

Thereafter, because of an exceptional loss of Rs 54 crore (on account of impairment of assets of South African subsidiary) and higher interest cost by about Rs 100 crore, the company negatively surprised the Street at the net level. Even without the exceptional loss, the profit would have come below estimates.

Nevertheless, in the coming months, analysts believe that there is a lot to be reconciled in terms of power availability and PLF. If the demand remains low, it will have a negative impact on JSW Energy’s earnings, at least in the interim period till the economy improves and demand particularly from the industrial segment improves. Additionally, the increasing grid availability in the coming months will lead to higher power supply in the market. Thus, there is fear that it could lead to further correction in merchant power rates, which will impact JSW Energy’s earnings given that 57 per cent of total units generated are sold on merchant power basis.