JSW reported 15% y-o-y decline in earnings in Q1FY16, which was more than our and consensus expectations because of reported declines in realisation per unit (compared to an expected increase) due to higher share of long-term power sales and lower merchant realisation. Overall revenue declined by 19% y-o-y, with generation down 11% y-o-y (4.5bu). At the same time, per unit fuel cost declined 7% y-o-y on lower international coal prices (down 17% y-o-y). In line with quarterly results, we cut our realisation expectations for the current and future years as the company guides for lower power prices.
We maintain our hold rating on the stock. Our DCF-based target price has decreased to R109 (from R116) as we cut our earnings estimates by 4-7% for FY16-18. Our target price implies 10.2% upside; a PB of 1.9x and PE of 10.3x for FY17e while the stock is currently trading at a PB of 1.7x and PE of 9.3x for FY17e.
Downside risks include a sharp unexpected increase in international coal prices; significantly higher than announced valuation of the ongoing deal; upside risks include a further decline in international coal prices; completion of proposed acquisitions or any other value accretive acquisition.