Buy JSW Energy shares, target price Rs 54: Nomura

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SummaryWe maintain buy on JSW Energy with a target price of R54...

We maintain buy on JSW Energy with a target price of R54, which is the rounded sum of the company’s milestone risk-adjusted FCFE of R47 per share plus FY14f cash-on-hand of R7 per share. The benchmark index for this stock is MSCI India.

Central Electricity Regulatory Commission (CERC) order suggests delay in starting up of ‘Raichur-Sholapur’ transmission line awarded to a private sector consortium. In an order, CERC has directed the licensees (consortium of Patel Engineering, Simplex Infrastructure, and BS Transcomm) of Raichur-Sholapur transmission line to explain the reasons for delay in construction of the line (resulting in missing the monthly targets) by December 24.

Our earnings estimates for JSWE already built-in narrower premium of merchant tariffs in South India vs the national average in context of progressive integration of the Southern Grid with the National Grid starting in Q1 CY14; our blended merchant tariff realization forecast is R4.2/kWh in FY15 and R4/kWh in the long-term. No implications for our earnings forecasts / TP for the stock on the back of this development. The stock trades at 1.2x price-to-book (P/B), 8.4x P/E (EPS = R6.5) on our FY15f earnings forecasts.

As South India is the primary geography where the bulk of JSW Energy’s (JSWE’s) open-ended coal-fired capacity is sold, only 45% of the offtake from 860MW Vijayanagar facility (in Karnataka) is tied up for FY15 and progressive integration of the Southern Grid with the National Grid is expected to shrink the premium of merchant tariffs between South India and rest of the country, a delay in effective increase in inter-grid transfer capacity (which was to begin with the commissioning of the Raichur-Sholapur transmission lines) is typically viewed positively for JSWE’s earnings outlook for FY15.

- Nomura

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