JSW Energy: Negatives priced in

In-line performance provides relief, concerns factored in on debt and merchant power realisations

JSW Energy’s stock, after correcting significantly from Rs 126 in a year, is trying to consolidate and look up now. The in-line December 2015 quarter results last Wednesday saw the stock rise six per cent to Rs 73.65. The major concern leading to the stock’s correction was weak operational performance owing to subdued demand and realisations, and increasing debt led by acquisitions.

While its acquisition-led strategy is positive given the time and effort required to establish new capacities, increased debt at a time when industry’s generation is exceeding demand and merchant power realisations are subdued, has increased the Street’s concerns.

Caution also prevails on average realisations looking at grid synchronisation by end-2016.

Factoring these concerns and the share price correction, analysts have upgraded their ratings from Sell to Neutral/Buy on the stock wherein target prices reflect a 0-15 per cent upside potential.

Meanwhile, for the December 2015 quarter, the company’s revenue growth of 11 per cent was helped by acquired capacities while profitability (Ebitda margins of 45 per cent up 410 basis points) got a boost from lower coal costs. But, increasing interest cost and depreciation saw net profits decline 15.6 per cent, year-on-year. The company’s total debt has increased from Rs 9,300 crore at March-end to Rs 14,600 crore at September-end. According to Ambit Research, the firm’s average net debt/equity deteriorated to 1.8 times as on December 30 versus 0.9 times in March 2015, due to acquisitions of JP power assets.

The hydro power assets’ acquisitions, however, saw the company’s generation rise 12 per cent year-on-year to 6,052 million units, excluding it volumes were flat.

The company’s 240 Mw (3 x 80 Mw) Hydro project in Himachal is to achieve financial closure by FY16-end, while it has signed memorandums to acquire Monnet Ispat’s 1,050 Mw thermal capacity and Jaiprakash’s 500 Mw Bina Thermal Power. These will add to the top line, but it is crucial for the company to further improve its operational performance and lower debt for it to also reflect in the bottom line. Otherwise, sentiments towards the stock might not look up.