JSW Energy reported strong earnings for the quarter, aided primarily by higher contribution from the standalone assets through 8 % q-o-q improvement in realisations. Higher other income during the quarter further aided earnings, even as the rising prices of imported coal are yet to impact earnings. While the improvement in realisations is encouraging, we are unsure if the same is sustainable as capacity utilisations remain low and costs are on the rise.
Downgrade to Reduce (from Add) and revise TP to Rs 76/share.
Strong earnings performance aided by higher realisations, large other income
JSW Energy reported healthy earnings with Ebitda of Rs 8.8 bn coming in 5% ahead of estimates, and net income at Rs 2.9 bn — 50% ahead of our estimates of Rs 2 bn. We note that outperformance at the net income level was on account of higher other income, as the same included a non-recurring income of Rs 900 million attributable to certain surcharges. Higher net sales are on account of an increase in trading income during the quarter besides incremental contribution from the standalone assets.
Standalone performance was more impressive with realisations increasing 8% q-o-q to Rs 4.4/kwh, even as fuel costs remained subdued at Rs 3.1/kwh. Plant utilisations though remain subdued, with net generation at Ratnagiri and Vijaynagar having dropped 13% and 36% q-o-q, respectively. Spike in short-term tariffs may be short-lived, even as costs are rising Spike in merchant tariff rates on the exchange above Rs 5/kwh did surprise on the positive, while improving the earnings profile of JSW Energy for the quarter. In our view, the demand-supply mismatch is more seasonal than structural, and we retain our stance on a continued oversupply of generation assets in the power market in India. On the cost-side, prices of imported coal have risen to $92/ton over the past three months and will likely reflect in earnings over the new few quarters.
Valuations may not appear expensive, but return profile has deteriorated
At 1.1X P/B and 11X P/E, valuations for JSW Energy may not appear demanding, though they should be seen in the context of a deteriorating return profile. RoE for JSW Energy dropped to 6.5% in FY2017 and may improve only marginally to 7.3% in FY2018 owing to under-utilisation of assets. Incrementally, prices of imported coal have risen 16% to $92/ton, the impact of which is not visible in earnings just yet, though will likely erode margins from Q3FY18. Downgrade to Reduce (from Add) as most positives appear to be well priced while the negatives could erode earnings from now on.
Spike in short-term realisations, if sustained, as well as the potential tie-up of PPAs at Vijaynagar are positives, though the 20% stock performance in the past three months has already captured the same. We have revised our earnings estimates for FY2018 and FY2019 by 20% respectively to factor in higher other income as well as increasing merchant rate assumptions. Our revised target price of Rs 76/share could be at risk if merchant realisations are not sustained and coal prices continue to rise.
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