JSW Energy on good wicket, upgrade to buy

Updated: Jun 29 2013, 08:49am hrs
We upgrade JSW Energy to buy from neutral, but reduce our target price to R54 from R58 per share. Multiples appear sufficiently attractive (FY15f P/B at 0.9x, P/E at 6.7x; FY14f dividend yield at 3.7%) to accumulate the stock.

We believe the company remains on a good wicket for FY14 relative to its peers it is among a handful of private IPPs likely to generate FCF and payout dividends in the medium term, operational projects are not subject to the vagaries of domestic coal supply/policy issues and leverage is in check. Recent fall in the rupee does dent earnings, but the hit is mitigated by weaker seaborne thermal prices. We believe that the 27% correction in the stock price during the past month is exaggerated. Factoring in rupee at 60 (against 54 previously), together with lower seaborne thermal coal prices and inputs from our recent meeting with management, we lower our FY14 and FY15 EPS forecasts by 10% and 2%, respectively.

We continue to acknowledge the structural risk to earnings remains fairly high 70% of off-take from JSW coal-fired capacity (~50% of its overall capacity) is open-ended and 100% of its coal-fired capacity continues to use imported spot coal as feedstock as earnings remain highly sensitive to the interplay between three variables merchant tariff realisations, ex-Indonesia and South Africa FoB thermal coal prices and dollar-rupee exchange rate variation.