Event Update

Sector: Power Utilities

RESEARCH
BSE Sensex : 19,420
SELL
JSW ENERGY LTD. CMP Rs75
TP Rs75

The Indonesian Supreme Court cancelled the allocation of 01 April 2011

Sungai Belati mine to JSW Energy (JSWEL). The
Hitul Gutka +91-22-6618 6410
management indicated that the mine has been cancelled on
hitul.gutka@pinc.co.in
the ground of overlapping, i.e. allocation of the same mine
to two parties. This is contrary to their earlier commentary Vinod Nair +91-22-6618 6379
that JSWEL has first priority over other customers of Sungai vinod.nair@pinc.co.in
Belati for securing coal supply. Due to this, JSWEL will have
to resort to spot purchase of coal. Owing to an increase in Madhura Joshi +91-22-6618 6395
fuel cost, JSWEL has appealed to MERC for a revision in its madhura.joshi@pinc.co.in
PPA with MSEDCL. We read this news as incrementally
negative for the company which is already facing issues of
fuel security; continue to maintain SELL.
QUARTERLY SNAPSHOT (Rs mn)
Increased dependence on spot coal
Quarter Ended
With the cancellation of the Sungai Belati mine by the Indonesian Jun-10 Sep-10 Dec-10
Supreme Court, JSWEL’s dependence on spot coal will increase. Net Sales 9,324 8,462 10,765
In order to bridge this gap of ~2mtpa (29% of their steady state YoY Gr. (%) 209.6 50.5 53.4
requirement), the management indicated it is buying spot coal from
Op. Profit 4,523 3,249 3,538
Indonesia at US$40/ton FOB. We believe this price of coal is at a
OPM (%) 48.5 38.4 32.9
significant discount and await greater clarity on the finer details of
Adj. Net Profit 2,983 1,838 1,853
the pricing mechanism.
Event Update

YoY Gr. (%) 218.6 5.7 (9.6)

Approached MERC for revision in its PPA
In light of this development, JSWEL approached MSEDCL to revise
its PPA for 300MW – the levellized tariff of which is at Rs2.71/unit STOCK DATA
for 25 years. However, the request was rejected as the bid was
awarded on competitive bidding basis after taking all commercial Market cap Rs123.0bn
Book Value per share Rs33
risks into consideration. JSWEL has now appealed to MERC for
Shares O/S (F.V. Rs10) 1.6bn
revising the PPA.
Free Float 23%
VALUATIONS AND RECOMMENDATION Avg Trade Value (6 months) Rs157mn
52 week High/Low 136/67
We continue to remain negative on the stock given its high exposure Bloomberg Code JSW IN
to the merchant market and spot coal. With the cancellation of the Reuters Code JSWE.BO
mine, JSWEL’s dependence on spot coal purchase will increase
further. Due to limited clarity on the issue, we continue to factor
procurement from Indonesia for the time being. Incase the mines
are cancelled and JSWEL continues buying expensive PERFORMANCE (%)
spot coal, our earnings estimate and target price will be lower. 1M 3M 12M
Continue to maintain SELL with a target price of Rs75/share. Absolute 0.7 (24.0) (35.6)
Relative (4.7) (18.6) (44.0)
KEY FINANCIALS (Rs mn)
FY09 FY10 FY11E FY12E FY13E
Net Sales 18,356 23,763 40,070 76,650 83,232 RELATIVE PERFORMANCE
YoY Gr. (%) 41.9 29.5 68.6 91.3 8.6
Op. Profit 5,324 12,401 15,648 29,550 34,623 JSW ENERGY BSE (Rebased)
OPM (%) 29.0 52.2 39.1 38.6 41.6 200
Adj. Net Profit 2,767 7,509 8,797 13,362 14,906
YoY Gr. (%) (55.8) 171.4 17.2 51.9 11.6 160

KEY RATIOS 120

Dil. EPS (Rs) 5.1 4.5 5.2 8.1 9.1
ROCE (%) 8.9 11.4 9.9 13.1 12.8 80
RoE (%) 22.2 24.0 17.2 22.2 20.9
PER (x) 14.8 16.5 14.5 9.2 8.3 40
EV/ Net Sales (x) 5.4 8.2 5.6 3.4 3.3 Apr-10 Jun-10 Sep-10 Dec-10 Mar-11
EV /EBDITA (x) 17.9 15.1 13.3 8.5 7.7
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 RESEARCH
JSW Energy Ltd.

MSEDCL PPA could turn sour

MSEDCL signed a 25 years PPA with JSWEL for 300MW. This was awarded on competitive
bidding after the bidder has taken all commercial risks into consideration. Hence any
increase in cost of generation will have to borne by JSWEL. Since this is a significant
change, JSWEL had approached MSEDCL for a revision in the PPA. However this has
been rejected, in line with the decision which prevailed for Adani Power’s 1,000MW PPA
with GUVNL. JSWEL has now appealed to MERC for considering this matter. If we consider
the Adani Power decision as a precursor, then JSWEL may have to go ahead with the
original PPA.

Yearly tariffs for the MSEDCL PPA

Commencement Date Rs/unit Commencement Date Rs/unit
1-Oct-10 2.21 1-Apr-23 1.76
1-Apr-11 2.18 1-Apr-24 1.87
1-Apr-12 2.13 1-Apr-25 1.87
1-Apr-13 2.08 1-Apr-26 1.87
1-Apr-14 2.03 1-Apr-27 1.87
1-Apr-15 1.98 1-Apr-28 1.87
1-Apr-16 1.93 1-Apr-29 1.66
1-Apr-17 1.88 1-Apr-30 1.64
1-Apr-18 1.82 1-Apr-31 1.62
1-Apr-19 1.81 1-Apr-32 1.60
1-Apr-20 1.80 1-Apr-33 1.57
1-Apr-21 1.79 1-Apr-34 1.55
1-Apr-22 1.77
Source: Company, PINC Research

Buying spot coal at US$40/ton FOB!

In order to bridge this gap arising out of the cancellation of the Sungai Belati coal mine,
JSWEL is buying coal from the Indonesian spot market at US$40/ton FoB. Although this
price seems extremely low – in the light of ~US$120+ for the Richards Bay coal price – we
believe that either the quality of coal is inferior or the pricing mechanism is similar to that
of Sungai Belati – i.e. linked to the RB Index. We continue to await for further clarity on the
same before changing our estimates.

Richards Bay FOB coal price has risen to US$121/ton

RB Index FOB Coal Price
200
(US$/ton)

160

120

80

40

0
Apr-08 Nov -08 Jun-09 Jan-10 Aug-10 Mar-11

Source: Company, PINC Research

hitul.gutka@pinc.co.in 2
 RESEARCH

JSW Energy Ltd.

Higher coal price weighs on profitability
During Q4FY11 average RB Index coal price increased to US$121/ton from US$104/ton in
the sequential quarter. We expect the company to report coal purchase at ~US$120-125/
ton during Q4 FY11, thus pressurizing earnings. We build in spot coal purchase of 4.95mt
in FY12 and 2.71mtpa on a steady state basis thereafter till the CIC Energy mine
commissions. Incase the mines are cancelled, JSWEL’s steady state spot coal purchase
will nearly double to c.4.71mtpa from FY13 onwards.

JSWEL entered into a long-term coal supply contract with PT Sungai Belati, Indonesia,
for ~3mtpa. However, this has been reduced over time to ~2mtpa. As per the contract
between JSWEL and Sungai Belati, JSWEL has first priority over other customers
of Sungai Belati for securing coal supply. This coal would be used to fire part of its
600MW at Vijayanagar and 1,200MW at Ratnagiri. With the price of coal being linked to
the RB Index, we estimate the landed cost of this coal to be at ~US$75/ton.

Prospecting licence of one mine of CIC not renewed, JSWEL can relinquish the
deal
Government of Botswana yesterday renewed the prospecting licence of Mmamabula East
(measured reserves of 2.3bn tons) of CIC Energy for a period of two years beginning April
1, 2011. However, CIC has been advised by the Government that the Company’s application
for a renewal of prospecting licence for Mmamabula South mine (measured reserve of
311mn tons) has not been approved. Since the Mmamabula South coal block has already
been renewed twice, under the terms of the Botswana Mines and Minerals Act, a third
renewal therefore is discretionary. However, the Company has requested the Government
to reconsider its decision.
Due to the non-renewal of the prospecting mine, JSWEL has the option to either re-negotiate
or not to proceed with the proposed acquisition of CIC Energy, thus resulting into lesser or
no cash outflow for the company.
Profitability to remain under pressure
JSWEL’s earnings momentum is linked to: 1) capacity addition, 2) firm short-term rates
and 3) low spot coal prices. As bulk of its capacity would be sold in the short-term market
– where rates are expected to remain soft, we expect its earnings to witness 26% CAGR
over FY10-13. Also JSWEL is facing delays in capacity addition with no progress being
achieved at its Barmer and Ratnagiri projects during Q4 FY11. However the management
remains upbeat on commissioning all the units at both these locations during the year.
JSWEL also continues to face delays in commissioning of its lignite mines, thus consuming
expensive imported coal. Continue to remain negative on the stock, maintain SELL with a
target price of Rs75/share.

hitul.gutka@pinc.co.in 3
 RESEARCH

JSW Energy Ltd.

Year Ended March (Figures in Rs mn)

Income Statement FY09 FY10 FY11E FY12E FY13E Cash Flow Statement FY09 FY10 FY11E FY12E FY13E
Revenues 18,356 23,763 40,070 76,650 83,232 Pre-tax profit 3,678 8,733 10,915 16,223 18,710
Growth (%) 41.9 29.5 68.6 91.3 8.6 Depreciation 602 1,361 2,434 5,539 5,940
Operating Profit 5,324 12,401 15,648 29,550 34,623 Total tax paid (912) (1,224) (2,074) (2,811) (3,742)
Other Income 166 530 1,340 1,356 1,284 Chg in working capital 11,070 (5,287) 5,081 5,549 1,019
EBITDA 5,490 12,931 16,988 30,906 35,908 Other items - (54) (334) (49) (62)
Growth (%) (39.6) 135.5 31.4 81.9 16.2 Cash from oper. (a) 14,439 3,529 16,022 24,450 21,866
Depreciation & Amortization 602 1,361 2,434 5,539 5,940 Capital expenditure (52,070) (31,919) (45,050) (59,717) (33,238)
EBIT 4,888 11,570 14,554 25,367 29,967 Chg in investments (1,497) (12,640) - - -
Interest Charges (Net) 1,209 2,837 3,640 9,144 11,257 Other items - - - - -
PBT (Before E/o items) 3,678 8,733 10,915 16,222 18,710 Cash from inv. (b) (53,568) (44,559) (45,050) (59,717) (33,238)
Tax provision 912 1,224 2,074 2,811 3,742 Free cash flow (a+b) (39,129) (41,030) (29,028) (35,267) (11,372)
Minority interest - - 44 49 62 Equity raised/(repaid) 1,904 26,985 - - -
Pre-exceptional PAT 2,767 7,509 8,797 13,362 14,906 Debt raised/(repaid) 36,545 19,430 32,226 43,100 14,673
Extra-ordinary items - (54) (290) - - Change in Minority Int (648) - 44 49 62
Net Profit 2,767 7,455 8,507 13,362 14,906 Dividend (incl. tax) - (1,434) (1,637) (2,571) (2,868)
Growth (%) (55.7) 169.4 14.1 57.1 11.6 Other items 130 346 - - -
Diluted EPS (Rs) 5.1 4.5 5.2 8.1 9.1 Cash from fin. (c) 37,930 45,327 30,633 40,578 11,867
Growth (%) (58.3) (10.2) 14.1 57.1 11.6 Net chg in cash (a+b+c) (1,198) 4,297 1,606 5,311 495

Balance Sheet FY09 FY10 FY11E FY12E FY13E Key Ratios FY09 FY10 FY11E FY12E FY13E
Equity Share Capital 5,466 16,401 16,401 16,401 16,401 OPM (%) 29.0 52.2 39.1 38.6 41.6
Reserves & Surplus 9,331 31,401 38,272 49,063 61,101 Net Margin (%) 15.1 31.6 22.0 17.4 17.9
Shareholders' Funds 14,797 47,802 54,672 65,464 77,502 Dividend Yield (%) 0.0 1.0 1.1 1.8 2.0
Minorities Interest 152 152 196 245 307 Net Debt/Equity (x) 3.9 1.5 1.9 2.2 2.0
Total Debt 59,272 78,701 110,928 154,028 168,700 Net working capital (days) (274.8) (132.2) (124.1) (90.9) (88.1)
Deferred Tax liability 815 1,161 1,161 1,161 1,161 ROACE (%) 8.9 11.4 9.9 13.1 12.8
Capital Employed 75,035 127,817 166,957 220,898 247,671 ROANW (%) 22.2 24.0 17.2 22.2 20.9
Fixed Assets 85,593 116,151 158,767 212,945 240,242 EV/Sales (x) 5.4 8.2 5.6 3.4 3.3
Cash & cash eq. 1,751 6,048 7,654 12,965 13,460 EV/EBITDA (x) 17.9 15.1 13.3 8.5 7.7
Net current assets (14,013) (8,727) (13,808) (19,357) (20,376) PER (x) 14.8 16.5 14.5 9.2 8.3
Investments 1,705 14,344 14,344 14,344 14,344 PCE (x) 12.2 13.9 11.0 6.5 5.9
Total Assets 75,035 127,817 166,957 220,898 247,671 Price/Book (x) 2.8 2.6 2.2 1.9 1.6

P/BV Band Median P/BV v/s Daily P/BV

200 Daily PBV Median PBV

5
4.1X
150
3.6X
4
3.1X
100 2.7X
2.2X 3

50 2

0 1
Jan-10 Apr-10 Aug-10 Nov -10 Mar-11 Jan-10 Apr-10 Aug-10 Nov -10 Mar-11

hitul.gutka@pinc.co.in 4
 RESEARCH

T E A M
EQUITY DESK
Sadanand Raje Head - Institutional Sales sadanand.raje@pinc.co.in 91-22-6618 6366
Technical Analyst

RESEARCH
Vineet Hetamasaria, CFA Head of Research, Auto, Cement vineet.hetamasaria@pinc.co.in 91-22-6618 6388
Nikhil Deshpande Auto, Auto Ancillary, Cement nikhil.deshpande@pinc.co.in 91-22-6618 6339
Tasmai Anil Merchant Auto, Auto Ancillary, Cement tasmai.merchant@pinc.co.in 91-22-6618 6377
Vinod Nair Construction, Power, Capital Goods vinod.nair@pinc.co.in 91-22-6618 6379
Ankit Babel Capital Goods ankit.b@pinc.co.in 91-22-6618 6551
Hitul Gutka Power hitul.gutka@pinc.co.in 91-22-6618 6410
Subramaniam Yadav Construction subramaniam.yadav@pinc.co.in 91-22-6618 6371
Madhura Joshi Power madhura.joshi@pinc.co.in 91-22-6618 6395
Satish Mishra Fertiliser, Natural Gas, Engineering satish.mishra@pinc.co.in 91-22-6618 6488
Urvashi Biyani Fertiliser, Natural Gas, Engineering urvashi.biyani@pinc.co.in 91-22-6618 6334
Naveen Trivedi FMCG naveent@pinc.co.in 91-22-6618 6384
Rohit Kumar Anand IT Services rohit.anand@pinc.co.in 91-22-6618 6372
Namrata Sharma Media namrata.sharma@pinc.co.in 91-22-6618 6412
Ronak Bakshi Media ronak.bakshi@pinc.co.in 91-22-6618 6411
Bikash Bhalotia Metals, Mining bikash.bhalotia@pinc.co.in 91-22-6618 6387
Harleen Babber Metals, Mining harleen.babber@pinc.co.in 91-22-6618 6389
Dipti Vijaywargi Metals, Mining dipti.vijaywargi @pinc.co.in 91-22-6618 6393
Sushant Dalmia, CFA Pharma sushant.dalmia@pinc.co.in 91-22-6618 6462
Suman Memani Real Estate, Mid caps suman.memani@pinc.co.in 91-22-6618 6479
Abhishek Kumar Real Estate, Mid caps abhishek.kumar@pinc.co.in 91-22-6618 6398
C Krishnamurthy Technical Analyst krishnamurthy.c@pinc.co.in 91-22-6618 6747

SALES
Rajeev Gupta Equities rajeev.gupta@pinc.co.in 91-22-6618 6486
Ankur Varman Equities ankur.varman@pinc.co.in 91-22-6618 6380
Himanshu Varia Equities himanshu.varia@pinc.co.in 91-22-6618 6342
Shailesh Kadam Derivatives shaileshk@pinc.co.in 91-22-6618 6349
Ganesh Gokhale Derivatives ganeshg@pinc.co.in 91-22-6618 6347

DEALING
Mehul Desai Head - Sales Trading mehul.desai@pinc.co.in 91-22-6618 6303
Naresh Panjnani Co-Head - Sales Trading naresh.panjnani@pinc.co.in 91-22-6618 6333
Amar Margaje amar.margaje@pinc.co.in 91-22-6618 6327
Ashok Savla ashok.savla@pinc.co.in 91-22-6618 6321
Sajjid Lala sajjid.lala@pinc.co.in 91-22-6618 6337
Raju Bhavsar rajub@pinc.co.in 91-22-6618 6322
Kinjal Mehta kinjal.mehta@pinc.co.in 91-22-6618 6333
Chandani Bhatia chandani.bhatia@pinc.co.in 91-22-6618 6324
Hasmukh D. Prajapati hasmukhp@pinc.co.in 91-22-6618 6325
Kamlesh Purohit kamlesh.purohit@pinc.co.in 91-22-6618 6357

SINGAPORE DESK
Amul Shah amul.shah@sg.pinc.co.in 65-6327 0626
DIRECTORS
Gaurang Gandhi gaurangg@pinc.co.in 91-22-6618 6400
Hemang Gandhi hemangg@pinc.co.in 91-22-6618 6400
Ketan Gandhi ketang@pinc.co.in 91-22-6618 6400

COMPLIANCE
Rakesh Bhatia Head Compliance rakeshb@pinc.co.in 91-22-6618 6400
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