The stock of power producer JSW Energy has gained 16 per cent since our buy recommendation in November. Investors can still consider buying the stock, which is reasonably priced. At ₹95, it discounts its trailing 12-month earnings by 12 times, lower than its five-year average valuation of 17 times.
The stock offers potential for further upside. One, the company is expanding its generation capacity.
Next, unlike many other private power producers, JSW Energy has a strong balance sheet with manageable debt levels.
JSW Energy operates a thermal power generation capacity of 3,140 MW, comprising plants at Ratnagiri in Maharashtra, Barmer in Rajasthan and Vijayanagar in Karnataka.
It is now set to expand capacity and diversify into hydro power too. In November 2014, it signed an agreement with Jaiprakash Power Ventures to acquire the company’s two operational hydroelectric power projects — the 300 MW Baspa II and the 1,091 MW Karcham Wangtoo in Himachal Pradesh — for a base enterprise value of ₹9,700 crore.
While the acquisition, which is expected to be completed in 2015-16 does not appear cheap, the final purchase price is negotiable and could be lower.
Apart from this, JSW Energy is also setting up the 240 MW Kutehr hydroelectric project, for which land acquisition is underway.
JSW Energy sells power both under long-term power purchase agreements (PPAs) and in the merchant market. The latter exposes it to tariff volatility and buyer uncertainty.
But the share of merchant sales has been declining consistently over the past few years- from 64 per cent of the company’s power sales in 2011-12, it has fallen to 44 per cent now. The rest comes from sales made under long-term agreements that provide greater revenue certainty.
The precarious financial position of state distribution utilities, however, remains a concern as they limit power purchases. Impacted by weak demand from distribution utilities, JSW Energy had reported a fall in sales revenue in 2013-14.
Higher power sales the next year, however, helped the company grow revenues 7.7 per cent.
Fuel advantage
JSW Energy seems to be well placed on the fuel front too. It runs its Barmer plant on lignite from the Kapurdi mines operated by Barmer Lignite Mining Company (BLMC), its joint venture with the Rajasthan government.
During 2014-15, JSW Energy reported a year-on-year 19 per cent increase in power production from its three plants to 20,307 MW. Greater availability of lignite, thanks to the government’s approval for expansion of capacity of the Kapurdi mines, helped.
The plant, which accounts for a third of JSW Energy’s operational capacity, saw its plant load factor go up from 68 per cent in 2013-14 to 78 per cent last fiscal. This could go up further once the BLMC-run Jalipa mines turn operational in 2015-16.
JSW Energy has also benefitted from the significant cool-off in international coal prices. Its plants at Vijayanagar and Ratnagiri run on imported coal.
With the downtrend in global coal prices unlikely to reverse soon, the company should remain in a sweet spot.
Improving performance
In 2014-15, JSW Energy’s net profit rose 79 per cent year-on-year to ₹1,350 crore. Its operating profit increased 12 per cent to ₹3,854 crore. Higher power sales (despite lower realisations) and cheaper coal improved operational profitability.
Lower exceptional loss, primarily due to the company’s move towards complete hedging of its foreign currency exposure to buyers’ credit, boosted net profit.
Also, JSW Energy’s healthy balance sheet has improved further. The company’s consolidated debt-to-equity ratio came down to 1.1 times as on March 2015 from 1.4 times a year ago.