>JSW ENERGY LIMITED

■ Capacity to increase ~2x by FY12
JSW Energy (JSWEL) plans to more than double its capacity to 3.1GW by FY12 from 1.4GW currently. It plans to sell ~56% of its expanded capacity in the short-term market, which would increase its earnings sensitivity. If we consider the 270MW Raj West extension, the share of merchant capacity increases further to ~60%.

■ Exposed to the spot market for 46% of total coal requirement
JSWEL has entered into long term coal supply contract with PT Sungai Belati and its South African company (South African Coal Mining Holding Ltd), which will together supply ~4mtpa. We believe
this will meet only ~54% of its total coal requirement of ~7mtpa in FY13, thus keeping it exposed to the spot market (on a steady state basis) for ~3.2mtpa. This dependence would be higher in
FY12E at ~4.8mn tons, as the company operates a part of its Rajasthan unit on imported coal.

■ Expect 13% downside; Initiate with SELL recommendation
Although, JSWEL is one of the fastest-growing power companies, we believe its high exposure to spot market only increases earnings sensitivity. Robust 66% earnings CAGR over FY10-12E, due to higher operational capacity, should allow the stock to trade at a premium in the near future. We expect the premium to contract as: 1) capacity addition slows; 2) short-term rates soften; and 3) fuel prices increase. Decline in profitability and higher interest outgo will contract its RoE going forward. Hence, further upside for the stock seems limited, in our view. We value the company on FCFE to arrive at our target price of Rs117, implying potential downside of 13%. We initiate coverage with a SELL recommendation.

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