Stock Pick From The Power Sector

HERE IS WHY:

• The company has recently added 540 MW capacity which will boost its sales
• Merchant power tariffs have rose which will give better realisations 
• International coal prices have also corrected, and hence margins will expand

After our previous recommendation in DSIJ Vol. 27, Issue No. 16, we are once again recommending JSW Energy to our readers this time around. This is in view of the attractive valuation of the stock as well as the addition of new capacities by the company. Besides, the recent order by CERC in favour of power companies would act as a sentiment booster for stocks in the sector, resulting in better appreciation of their prices. The merchant tariffs and volumes have also gone up, and this will benefit JSW Energy (JSWEL), a prominent player in the power trading business. This is the only stock that has generated fantastic returns for investors in the power sector, reinforcing our confidence in it.

JSWEL currently has a power generating capacity of 3140 MW. It plans to add a total capacity of 11770 MW, which will make it a leading power generating company. The power business is the largest business segment of the company, and accounts for 85 per cent of its total revenues. Among other businesses, JSWEL has a power trading business, as also a few coal and lignite mines.

We are confident of the stock as it enjoys better fuel security as compared to its peers. This is reflected in its plant load factors (PLF) reported in the December 2013 quarter. For its Vijayanagar power plant, the company reported a PLF of 102 per cent against 85 per cent a year before. Similarly, for the Barmer and Ratnagiri plants, the company reported PLFs of over 80 per cent each, which are also higher as compared to the same period last year.

Shareholding pattern ( 31/12/2012)
Promoter and Promoter Group	76.72
Public	12.8
FII	2.9
DII	6.04
Bodies Corporate	1.54
Total	100

JSWEL sells about 53 per cent of the total power through the merchant route and the rest through long-term agreements. For most of its capacity, the company is dependent on coal imports. The international coal prices, in the last one year, have fallen by about 15-20 per cent. This is a good sign for JSW Energy, which will see expansion of its profit margins. The volumes and prices on the power exchanges have also shown a rise, resulting in a better performance for JSW Energy. One should also consider that the company has recently commissioned 540 MW of capacity which will further boost its performance.

The most compelling factor behind recommending the company is that it has reported profits for the last four quarters in a row, while the performance of many power companies has deteriorated over the same period. On the operating front too, JSWEL's performance has remained strong with improved EBITDA margins in Q2FY13 and Q3FY13.

On the financial front, the company is on the course to report a superior financial performance in FY13. For 9MFY13, JSWEL has reported a 63 per cent jump in its total revenues. The net profit in this period was at Rs 568 crore as against a loss of Rs 55 crore. The EBITDA margins stood at 32 per cent, showing a YoY improvement of 800 basis points. The realisations in the third quarter were seen at Rs 4.27 per unit against Rs 3.94 per unit a year before.

On the valuations front, the stock is trading at 7x its annualised EV/EBITDA and the EV/MW stands at 6.2x, both in line with its peers. The higher merchant tariffs, as well as the addition of new capacity would help the company come up with a better financial performance. We would advise investors to enter the counter with a price target of Rs 68.

Last Five Quarters (Rs/Cr)
	Dec-12	Sep-12	Jun-12	Mar-12	Dec-11
Total Income	2365.24	2076.53	2191.54	2081.23	1768.66
Power & Fuel	1307.74	1099.9	1154.71	1296.33	1140.81
Depreciation	157.16	160.53	169.7	150.94	137.88
Interest	236.4	228.11	242.59	232.91	199.47
Tax	100.46	72.11	15.98	60.68	-14.77
Net Profit	310.51	254.04	3.41	225.32	-82.67
Equity Share Capital	1640.05	1640.05	1640.05	1640.05	1640.05