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Negatives have been priced in for JSW Energy

(25 Jan 2016)

JSW Energy’s stock, after having corrected significantly from Rs 126 level in a year, is now trying to consolidate and look up. Post the in-line December 2015 quarter performance, the stock is up 6.5% in two trading sessions to Rs 74 level. The major concern that led to a correction in the stock was the weak operational performance due to weak demand and realisation scenario. 

The company continues with its acquisition-led strategy to add capacities. The inorganic growth strategy is positive, given the time and effort required to set up new capacities. 

Taking into account the distress in the sector, deal valuations are also reasonable. However, it is also leading to increased debt and in the current scenario, wheregeneration capacities are exceeding demand and merchant power realisations too are subdued, the concerns of Street get alleviated. 

Caution also prevails on average realisations looking at grid synchronisation by end of 2016. About 2,000 MW of power from North India is likely to flow into South by the end of CY16 versus the current deficit of 3,300 MW in FY15 in southern states.

Nevertheless, after factoring all these concerns and the share price correction, many analysts have changed their ratings from ‘sell’ to ‘neutral’ or ‘buy’ on the stock. The target prices by analysts at Ambit, who still maintain a ‘sell’ rating, stands at Rs 73. While those at Kotak Institutional Equities are having ‘add’ ratings and have a target price of Rs 85.

Meanwhile, for the December quarter, the company’s revenue growth of 11% was helped by acquired capacities, while profitability (Ebidta margins of 45% up 410 basis points) got a boost from lower coal costs. However, the 58% rise in interest costs and 34.5% increase in depreciation took the sheen away as the reported profits declined 15.6% year-on-year. The company’s total debt has increased from Rs 9,300 crore at March-end to Rs 14,600 crore at September-end. Average net debt/equity deteriorated to 1.8 times as on 30 December versus 0.9 times in March'15, as per Ambit Research, due to funding of acquisitions by JP.

The company’s generation during the quarter at 6,052 million units marked a growth of 12 % year-on-year led by consolidation of acquired hydro assets; excluding the same volumes were flat. Its plants at Ratnagiri and Barmer reported impressive performance with PLF (plant load factor) of 90% and deemed PLF of 85% as against 86% and 77%,  respectively, in the year ago quarter. The Vijaynagar plant saw lower PLF due to weak demand from its steel plant and the acquired hydro power assets in Himachal have achieved an average PLF of 24% during the quarter due to seasonal factors.  

The company’s 240 MW (3 x 80 MW) Hydro project in Himachal is to achieve financial closure by FY16-end. The company had also signed memorandums to acquire Monnet Ispat’s 1,050 MW thermal capacity and Jaiprakash’s 500 MW Bina Thermal Power. While these will add to topline, it is crucial for the company to further improve its operational performance and lower debt levels for it to also reflect in the bottomline. Otherwise, sentiments towards the stock may not look up.

News Source : Business Standard