JSW Energy’s (JSWEL) performance was hit due to its “converter” business model with open exposure on coal. Correction in global coal prices has improved the situation. Global thermal coal indices are down ~35% since their peak in December 2010,led by changing US energy dynamics,slowdown in demand from China,etc. Even in rupee terms,the indices are down by ~17% despite rupee depreciation.
JSWEL is a key beneficiary with ~1.5GW merchant capacity located in high-deficit consumption regions. For FY12,JSWEL’s standalone reported fuel cost at R2.84/unit (v/s R2.53/unit y-o-y),and we expect moderation over 8-10% over FY13E/14E. We assume average Richard Bay’s index at $90/tonne for FY13 and $88/tonne for FY14 v/s current price of below USD85/ton.
CoD ( commercial operation date) of Raj West project (Sep-12) would pave way for final tariff ,removing uncertainty on under-recovery for an otherwise regulated return project. This along with group captive will mean offtake mix in favor of regulated projects,reducing earnings volatility. Delayed commissioning and under-recoveries led to negative contribution from project in FY11 and FY12.
Entire project (1,080MW) is expected to be commissioned by 1HFY13 (540MW already commissioned),which would pave the way for final tariff petition/order approval from regulator. This should,in our view,remove uncertainty on underrecoveries for an otherwise regulated return project. Approval of variable cost of lignite (R1,981/tonne v/s approved cost of R1,193/tonne in Apr-12 interim order) is critical to improved profitability. Against R88 crore loss in FY12,we expect positive contribution of R6.4 crorein FY13,rising further to R330 crore in FY14.
Expect JSWEL’s consolidated EPS CAGR of 79% over FY12-14,driven by fuel cost savings and full year contribution from Raj West in FY14. JSWEL’s FY12 net DER is 1.5x (among lowest in peers),which would further moderate over next 2 years.
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