Friday, February 10, 2012

>JAIPRAKASH POWER: (1) funding NCD repayment, (2) forest clearance for Dongri-tal II & (3) use of captive coal in Bina

 Better than expected quarter on higher VERs and merchant rates
JPVL’s 3Q12 results have surprised us with PAT reported at Rs595mn against our estimate of Rs317mn. The performance is driven by (1) higher revenues booked from sale of Verified Emission Reductions (Rs292mn,+30% yoy) and (2) better merchant realizations at Karcham (Rs4.7/unit). Net revenues grew by 162% to Rs3.7bn while gross generation volumes grew by 75% to 1.2BU. EBITDA margins have improved by 648bps yoy to 90%, though declined by 362bps sequentially.

■ Fine tuned our estimates, revise FY12E/FY13E EPS by -0.9%/-1.1%
We have done some fine tuning of our numbers to incorporate better than expected realizations at Karcham during FY12E, higher revenues from VER and lower other income. Consequently we revise our FY12E/FY13E EPS by -0.9%/-1.1% respectively.

■ Many issues addressed; clarity on a few yet to emerge
Many of the issues faced by JPVL have been addressed with (1) Offtake at Karcham after favorable HC order (though SC case pending); (2) management putting on hold all the under development projects (Karchana, Lower Siyang etc) resulting into limited funding and fuel requirement, (3) Govt’s softened stance on no-go and forest approvals. However we would like to wait for further clarity over 1) funding for NCD bullet payment in Feb 2013, 2) forest clearance for Dongri Tal II mine and 3) approval for use of captive coal mine for Bina, to blend with linkage coal. One more big risk that we see is, in case HP levies water cess – Karcham being a merchant power plant would be impacted severely. However, as of now there is no indication/proposal.

■ Clarity awaited over funding and coal

We believe that the stock is fairly valued at CMP, factoring in current operational and under construction projects along with upsides from the issues that are being addressed recently like HC order providing clarity over Karcham offtake (pending before SC) and funding concern for capex has eased out after management putting under-development projects on hold. However, we believe that JPVL will require equity infusion of at least Rs10bn for repayment of NCDs as BS will be under stretch with D/E expected to increase over 5 times by FY13E. Moreover JPVL is waiting for forest clearance for Dongri Tal-II and approval to use excess coal for Bina. Thus, in our view, further clarity is required to emerge over these issues to trigger any further upside in the stock. After the recent run-up, we downgrade the stock from Buy to Hold with TP of Rs45 (no revision).

To read the full report: JP POWER