JSW Energy's Q3FY18 results (Underperformer) - Dark Spread; Continues to be under pressure

Q3FY18 results

• Net generation for Vijayanagar TPS for Q3FY18 was 896MU, a decline of 3% yoy while Ratnagiri TPS net generation was 1.8BU, an increase of 25% yoy; 75% PLF. Vijayanagar TPS (860MW) entire capacity and 425MW of Ratnagiri TPS sells power on merchant basis.
• Vijayanagar TPS operated at a PLF of 51% (vs 53% in Q3FY17).  Dark spread (standalone power realisation minus fuel cost) has declined to Rs0.88/unit (decline of Rs0.27/unit qoq; Rs1.15/unit in Q2FY18) due to lower merchant realisations (200MW in bilateral at Rs4.1/unit and balance in merchant).  As a result, standalone EBITDA was Rs1.8bn (vs Rs2bn in Q2FY18 and Rs1.4bn in Q2FY17) and profit was Rs516m (vs loss in Q3FY17) aided by increase in other income and reduction in interest cost.
• Baspa and Karcham hydro power plant’s (operating under a subsidiary), generated 697MU (+2% yoy). Baspa and Karcham reported a EBITDA of Rs1.7bn in Q3FY18 ((Rs2.5bn in Q3FY17). Barmer TPS, (operating in another SPV) net generation was 1.8BU (deemed PLF of 83=2%; normative PLF of 80%). It reported a EBITDA of Rs2.3bn in Q3FY18 (vs Rs2.9bn in Q3FY17).
• As a result, consolidated EBITDA is Rs5.9bn (Vs Rs6.6bn in Q3FY17; estimate of Rs8.0bn) and PAT is Rs469m (vs Rs214m in Q3FY17; estimate of Rs2.0bn)

Key positives: Additional 176MW of PPA under long term from Karcham

Key negatives: Low PLF of Vijaynagar TPS; Large capital expenditure planned in Electric Vehicles (Rs30-40bn);  Bina acquisition deal called off

Impact on financials: We downgrade our earnings estimates for FY18E by 17% while maintain our FY19E/FY20E estimates

Valuation and View

We believe JSW energy Vijayanagar Power plant will find it challenging to tie up power due to additional supply coming on stream especially in south in next 6 - 18 months and slow pick up in demand (as evident in low PLF of Vijaynagar of 53%; deficit of 0%). Further, host of untied capacity has resulted in merchant prices in southern region falling to Rs3- 4/unit (vs Rs5-6/unit earlier). As a result, we expect JSW earnings in FY19 and FY20 to remain under pressure.  Given the challenges in tying up power for untied capacity, we believe there is high level of uncertainty in FY19 and FY20 earnings.  In view of sharp decline in earnings and increased uncertainty, we reiterate our Underperformer rating with a revised target price of Rs63/share (factor in current prices of JSW Steel – JSW Energy holds 70ms shares of JSW Steel).