JSW Energy : HOLD

FY11: Hit by Higher Fuel Costs & Execution Delays

JSW’s key FY11 highlights include: (a) sharp rise in imported spot coal prices (up from ~USD 75 to 110/tone); (b) stable merchant realizations at ~Rs 5/kWh; (c) issues with coal supply from

Indonesian fixed-priced contracts (resulting in higher dependence on spot market to ~85% from ~60% anticipated earlier); (d) execution delays in Ratnagiri (1,200 MW) & Barmer (1,080 MW) plants; (e) “under-review” status of the ~USD 400 mn bid to acquire CIC, due to regulatory hassles; and (f) worrisome rise in receivables to 65 days vs.avg. of 30 days for gencos.

Key Analyst meets takeaways

• Fuel: Blended fuel cost for FY11 stood at ~Rs 2.6/ unit (vs. Rs 1.9/ unit in FY10) and the mgmt expects it to remain in the range of Rs 2.6-2.8/ unit in FY12. During FY11, JSW sourced ~90% of its requirements from spot markets. To ensure stability in fuel sourcing, JSW is also looking to enter LT contracts with Indonesian suppliers for ~50% of its requirements. It expects price range of ~USD 50 (~4,000 GCV) to ~USD 90 (~5,500 GCV) for the same. The supplies from captive lignite mines in Rajasthan to commence from Q1FY12, thus reducing its dependence on imported coal requirements.
• Realizations:  For Q4, merchant was at Rs 4.71/unit while for FY11 it was at Rs 4.95/unit. Mgmt guided for moderation in merchant tariff and expects it to be in the range of Rs 4.5-4.75/ unit in FY12.
• Execution: At Ratnagiri (4x300 MW) project, the bottleneck in transmission has now been resolved and the mgmt expects commissioning of Unit 3&4 by Q1 and Q2FY12 resp. Further, at Rajasthan (8x135MW), the key bottleneck in captive lignite mines is also resolved & expects full commissioning progressively by end FY12. For captive-mine based Chhattisgarh (1,320 MW) and W. B. (300 MW) projects, mgmt expect construction to start by H2FY12.

HOLD with a Target price of Rs 74

We are concerned on the increased volatility in coal prices, as ~85% of coal requirement is from spot mkt. JSW is scouting for smaller mines (50-100 MMT) in Indonesia and currently has ~USD 225 mn cash. A successful acquisition would lead to re-rating of the stock.