MOSL: JSW ENERGY (Reiterating Buy)-Weak demand and higher fuel cost impact performance

​JSW Energy: Weak demand and higher fuel cost impact performance; Merchant capacities at discount to replacement cost; Reiterating Buy

(JSW IN, Mkt Cap USD1.7b, CMP INR62, TP INR88, 42% Upside, Buy)

• JSW Energy’s (JSWE) 4QFY17 EBITDA was down 48% YoY/11% QoQ to INR5.9b (est. of INR6.5b) due to lower generation (demand), shutdown at Ratnagiri and higher fuel cost. PAT was down 92% YoY/+13% QoQ to INR242m. For FY17, EBITDA declined 20% YoY to INR33b, while PAT fell 55% YoY to INR6.3b.
  
• Blending domestic coal provides hedge against coal prices: Blending domestic coal up to 50% at Ratnagiri and Vijaynagar would help if international coal prices are upwards of USD70-75/t (subject to e-auction coal prices; Exhibit 3, 4 and 5). It would act as a hedge against rising coal prices.
  
• PPA for 200MW at Karcham Wangtoo soon: Of the contracted capacity of 704MW, PPA for 200MW was pending approval of capital cost by CERC (on March 30 2017). The PPA is now expected soon (likely with Punjab).
  
• Likelihood of extension of short-term PPA at Vijaynagar: According to management, the 650MW PPA with Karnataka could be extended (expires by May 2017) as power availability from state gencos has reduced due to water shortage and maintenance. We estimate Vijaynagar to run at 50% PLF and realization of INR3/kWh for FY18, as we believe the extension, if any, will be for a very short period due to addition of new generation/transmission capacities.