JSW Energy’s (JSWEL) Q3 FY11 results were lower than our estimate due to 1) lower realizations, 2) lower net generation and 3) one time write off of refinancing related cost. Net generation was lower on account of 1) backing down of Ratnagiri unit and 2) breakdown of peripheral equipment and logistical hindrances at Raj West. We reduce our FY11 and FY12 estimates to capture higher dependence on spot coal and further delays in capacity addition. Re-iterate SELL with a reduced target price of Rs86/share.

Capacity addition aids revenue growth
JSWEL’s revenues witnessed a strong 53% yoy growth due to 1) higher capacity, 2) improved utilization at Raj West and 3) better average realization. Generation grew by 46% yoy to 2.4BU against 1.6BU in the corresponding period last year. However, CEA data suggests auxiliary consumption during the quarter could have been significantly higher, hence overall generation was lower than our estimate. Also average blended realization of Rs4.43/unit (short term rate of Rs4.87/unit) although higher by 3.6% yoy, was lower than our estimate of Rs4.7/unit.

Higher fuel and interest cost translate into 9.6% decline in pre-exceptional PAT
Again during the quarter, JSWEL continued to rely on purchase of spot coal as shipments from South Africa did not begin and that from Indonesia remained muted. Average price of coal during the quarter stood at ~US$120-130/ton. Also with the commissioning of a unit each at Raj West and Ratnagiri translated into a 29% jump in interest cost. However, this was offset by lower tax. As a result, its pre-exceptional PAT declined by 9.6% yoy to Rs1.9bn.

VALUTIONS AND RECOMMENDATION
During the analyst meet JSWEL management hinted at delays in commissioning of the lignite mines, coal shipments and capacity addition. Hence we reduce our shipment assumptions and increase spot purchase estimate to 5.2mt in FY12 from 4.7mt earlier. We further reduce our capacity addition estimate for FY11 by 705MW to 1.9GW, raise risk premium and increase the cost of coal to US$145/ton for FY12. As a result, our FY11 and FY12 earnings estimate are lower by 17% and 32% respectively, re-iterate SELL with a reduced target price of Rs86/share.

Refinanced Rs27bn worth of debt during 9M FY11
As a part of the debt refinancing scheme, JSWEL managed to refinanced a part of its debt for Vijaynagar and Ratnagiri projects. It refinanced debt worth Rs27.7bn during the current year. As a result its cost will be lower by ~1.59% p. a. from over 11% earlier. During the quarter JSWEL witnessed a one time write off of refinancing related cost of Rs290mn.

Moving towards coal security, but still a long way to go…
During Q3 FY11, JSWEL acquired South African based CIC Energy for CDN$422mn. CIC Energy has ~2.68bn tons of high grade coal in two mines. However, with majority of the clearances yet to be acquired and the infrastructure still to be developed, we do not expect the coal to start flowing in before FY18. The company is also developing a 300MW power plant in the region.

Coal shipments remain slow, increased dependence on spot purchases
Again during the quarter JSWEL was unable to ship coal from Indonesia while its South African mines are yet to commence significant production. Hence, the company had to rely on expensive spot purchases. JSWEL purchased ~90-95% of its coal requirement from the spot market. As a result its fuel cost increased to Rs2.66/unit from Rs1.69/unit in the corresponding period last year. It paid US$120-130/ton for spot coal. The management expects to import 50,000 tons/month from Indonesia and 75,000 tons/month from South Africa. Since its first lignite mine is expected to commence production from Q4 FY11, the company will use imported coal for its Raj West project. The second lignite mine is expected to commission in FY12. Hence, we increase our spot coal assumption to 3.55mt and 5.2mt from 3.4mt and 4.6mt for FY11 and FY12 respectively.

Confident to achieve ~Rs4.5/unit for short term tariff in FY12
JSWEL earned short term rate of Rs5.10/unit during 9M FY11. The company has entered into bilateral contracts upto May 2011 with some states where average realisations range between Rs4.80-5.20/unit. Hence it continues to remain confident of closing the year with average short term tariff of close to Rs5/unit. The management expects short term tariffs to settle at Rs4.50/unit for F12. This is in line with our assumption of Rs5/unit for FY11, Rs4.50/unit for FY12 and FY13 each.

Plans to expand Vijayanagar by 660MW
JSWEL plans to expand its existing 860MW at Vijayanagar by setting up a 660MW super critical unit. This Rs33bn expansion will be funded by 3:1 debt equity. Since this is a brownfield expansion, we believe achieving the key milestones should not be a problem. It has applied to the MoEF for its approval, which the management expects it will receive by early FY12. The project will be based on imported coal but will be designed to use domestic coal for which JSWEL has applied for linkages. The zero date for the project is envisaged to be April 2011 and is expected to be complete in about 42 months.

Increased dependence on imported fuel damages profitability, re-iterate SELL
JSWEL’s increased dependence on imported coal – due to delays in commencement of shipments from both Indonesia and South Africa and soft short term tariffs continue to weigh heavy on the company’s profitability. RB Index, the index to which the Indonesian coal is benchmarked, has risen 40% over last years average, thus translating into higher price of Indonesian coal. We revise the commissioning schedule of Raj West and Ratnagiri projects to factor in technical difficulties. Due to higher risk arising out of exposure to spot coal and merchant power sale and deteriorating balance sheet due to the acquisition of CIC Energy and payments towards increasing its stake in SACMH we raise the risk premium for the company to 7%. We further downgrade our earnings estimate by 17% and 32% for FY11 and FY12 respectively. We re-iterate SELL with a reduced target price of Rs86/ share.