JSW Energy

 

 

The outlook for JSW Energy looks promising considering the status of its projects and balance sheet. Mid-term investors can bet on this stock

   JSW Energy has regained limelight after strong quarterly numbers, aided by commissioning of newer capacities. The company tapped the primary equity market last year. Its stock has gained nearly 30% since then. It currently trades at a P/E of 18 times on a consolidated basis. Compared to its peers, it is placed very favourably. Investors with a mediumterm time frame can take exposure in the stock.

BUSINESS:

The company is in the business of power generation. It started operations in a big way only over the past 3-4 years. However, it has moved much faster as compared to its peers, which started around the same time. The company currently has a total generation capacity of about 1,000 megawatt, most of which has been commissioned over the past one year. Apart from these, it is executing a lignite-based project of a total capacity of 1,080 mw, of which 135 mw has been commissioned. The other project, based on coal of 1,200 mw, is expected to be commissioned in FY12.

   These projects will increase its capacity by about 1,000 mw in FY11, and another 1,000 mw in FY12, providing an impressive improvement in its financials. With more than 70% of the cost already spent, the projects are not expected to see any major delay. Further, it has bought stake in a coal mine in South Africa, which will take care of about 25% of its imported coal needs.

   Other than that, it has placed boiler, turbine and generator (BTG) orders for another 270 mw projects to be based on mixed fuel of coal and lignite, which is expected to be commissioned in 2013. It is also undertaking a hydro project of 240 mw capacity. However, the hydel projects typically take longer time, and it would be completed by the end of 2015 as per the company.

   The interesting part of private power plant developers is that they are not having a prior power off-take arrangement for complete generation capacity. While this puts them at higher risk if they don't find a buyer in the spot market, it also enables them to get a better price, which could be 40-60% higher. Unlike other commodities, power cannot be stored leading to loss of production in case the company does not have a buyer at any particular time. While, the company has been so far selling more in the spot market, it plans to sell more through prior purchase agreement going forward. The strategy looks quite prudent as the market may see more uncertainties with the commissioning of more capacities to serve the spot market.

FINANCIALS:

The company has grown at a very strong pace over the past three quarters, aided by the commissioning of some of its capacities. For the quarter ended June 30, 2010, both sales and profits nearly tripled over the corresponding quarter last year, on a consolidated basis. While fuel cost/sales ratio has risen considerably from 36% to 46%, it is still significantly lower than that for other generation companies. With a marginal increase in other operating cost, operating profit also grew by an impressive 170%. While interest and depreciation have also more than doubled, it does not pose any threat to the profitability with strong growth in operating cash flows. 

   For the past three quarters since the commissioning of the projects, while sales have risen by 80%, profits have risen by more than 229%. The profitability has been aided by lower growth in fuel and other operating cost.

OUTLOOK:

The outlook for the company looks promising considering the status of its projects and its balance sheet position. However, there is a slight risk with its significant dependency on imported coal, which has seen high volatility over the past 3-4 years and can affect the margins. To mitigate this risk, the company has bought a stake in a coal mine abroad, and should be following it with more such stake buy. Investors with a medium-term time frame can take exposure in this stock with significant upside potential, with expectation of reasonable gains in the next 3-4 months.