>JSW ENERGY LIMITED: Barmer tariff petition key near-term trigger

We initiate on JSW with a HOLD and a PT of Rs 50. We like the company for its conservativeness with regard to expansion, i.e., even under current operating conditions, JSW would be free cash positive (pre-debt this year and after debt and capex in 2 years). The company has also gained from lower imported coal prices YTD (a 1% change in INR-denominated coal prices would impact FY14 EPS by 1.5%). Nevertheless, most of these positives are priced in after the near 50% move YTD. At 12xFY14E PE, we think valuations are fair for utility with low visibility on tariffs and fuel costs.


 Limited capacity addition=FCF positive: JSW has guided for nil expansion until more clarity emerges on coal availability. While this could weigh on near-term MW growth, we think this will prepare them for profitable growth at an opportune time.


 Falling imported coal prices to help FY13 margins and earnings: YTD, global coal prices have corrected 20% in INR terms. JSW sources ~65% of fuel for its 3140MW capacity from overseas (SA+ID), and is likely to benefit from falling coal prices globally – every 1% change in INR-denominated coal prices would impact FY14 EPS by 1.5%. We expect benefits to earnings in 2QFY13.


 Barmer tariff petition key near-term trigger: JSW has filed a tariff revision petition before the Rajasthan Electricity Regulatory Commission (RERC) for revision of the lignite transfer price from Kapurdi and Jalipa mines (to ~Rs 1781/tn), and power tariffs from Barmer plant (from Rs3.35/kwh to Rs 4.86/Kwh). Against this, we have built in a tariff of Rs3.61/kwh - 10% RoE on the revised project cost.


 Valuation and rating: We think most of the positives are priced in at CMP. Given this, and its structurally dependence on imported coal, exposure to merchant power markets, and absence of capacity addition post FY13, we initiate with a HOLD with a TP of Rs 50/sh. Key upside risks are above expected ROE on Barmer, and lower than estimated international coal prices.


To read report in detail: JSW ENERGY


RISH TRADER