RESULTS REVIEW 2QFY13

02 NOV 2012

JSW Energy
OUTPERFORM
INDUSTRY CMP (as on 1 Nov 2012) Target Price
Nifty Sensex KEY STOCK DATA Bloomberg No. of Shares (mn) MCap (Rs bn) / ($ mn) STOCK PERFORMANCE (%) 52 Week high / low 3M Absolute (%) Relative (%) Promoters FIs & Local MFs FIIs Public & Others
Source : BSE

POWER Rs 63 Rs 64
5,645 18,562 JSW IN 1,640 104 / 1,938 125 Rs 77 / 36 6M 26.1 18.9 12M 22.0 15.7 76.72 6.17 2.27 14.84

In a sweet spot but upside limited

JSW Energys (JSWE) 2QFY13 APAT of Rs 1.61bn was below our estimate of Rs 2.08bn largely due to higher than estimated fuel costs. We believe that the companys business is currently in a sweet spot due to low international coal prices and strong merchant realizations in Southern India. But, at CMP the stock factors in these positives, in our view. Stock remains a play on movements in merchant tariffs, USD-INR exchange rate and international coal prices. Maintain OPF with a TP of Rs 64/sh (revised from Rs 62).
JSWEs APAT for 2QFY13 came in lower than estimates due to higher than estimated fuel cost. Fuel cost was higher due to company using high GCV coal which is better suited for monsoons and higher cost inventory. Management mentioned that fuel cost would come down in 3QFY13, in line with international coal prices, as high cost inventory got consumed in 2QFY13.

Average merchant realisation for the quarter was Rs 4.6 per unit (up 5% QoQ), driven largely by higher realisations in Southern India. Barmer plant (Raj West) units 5-8 are expected to be commissioned by FY13 end. There has been a delay in commissioning as the company has not yet received all clearances for enhancing production in the attached lignite mines. JSW energy is currently getting the benefit of high merchant rates in South India and lower international coal prices. While it is difficult to predict the trend in coal prices, we expect merchant rates in South India to correct and get in line with rest of India once Southern grid gets synchronized with NEW grid in Jan-14. We revise our TP marginally upwards to Rs 64/sh (from 62) due to change in our long term USD-INR exchange rate assumption from 51.5 to 50. We have assumed long term merchant tariff at Rs 4.0/unit and long term coal price at USD 80/tone. Maintain Outperform.

6m avg traded value (Rs mn)

23.0 15.2

SHAREHOLDING PATTERN (%)

Financial summary
Year Ending March (Rs mn) Net Sales EBITDA APAT Diluted EPS (Rs) P/E (x) P/B (x) RoE (%) 2QFY13 20,394 5,769 1,615 1.0 2QFY12 9,655.6 1,181.7 (221.4) (0.1) YoY (%) 111 388 NM NM 1QFY13 21,552 5,834 2,359 1.4 QoQ (%) (5) (1) (32) (32) FY12 61,188 14,451 3,298 2.0 31.6 1.8 5.8 FY13E 70,009 25,920 10,298 6.3 10.1 1.6 16.9 FY14E 78,420 33,548 14,464 8.8 7.2 1.4 20.6 FY15E 78,038 32,666 14,696 9.0 7.1 1.2 18.1

Abhinav Sharma abhinav.sharma@hdfcsec.com +91-22-6171-7331

Source: Company, HDFC Sec Inst Research

HDFC Securities Institutional Research is also available on Bloomberg HSLB <GO>

JSW ENERGY : RESULTS REVIEW 2QFY13

2QFY13 result and analyst meet : Key takes

APAT for 2QFY13 came in lower than estimates due to high fuel cost. Fuel cost was higher due to company using high GCV coal which is better suited for monsoons and higher cost inventory. Management mentioned that fuel cost would come down in 3QFY13, in line with international coal prices, as high cost inventory got consumed in 2Q. Average merchant realisation for the quarter was Rs 4.6 per unit (up 5% QoQ), driven largely by higher realisations in Southern India. Realisations from Vijaynagar plant were in excess of Rs 5 per unit and we expect higher realization to continue for the rest of the year. PLFs for Ratnagiri (1,200 MW) and Vijaynagar (860 MW) continue to remain strong during the quarter. Ratnagiri operated at a PLF of 90% and Vijaynagar at a PLF of 100%. The company has received approval from RERC to increase its tariff for units 1-4 of Raj West (8X135 MW) plant to Rs 3.627/unit from Rs 3.34/unit. Management expects Raj West to turn break even at PBT level at this tariff. For 2Q Raj West has reported a loss of Rs 280mn. RERC has also adjudicated that first year tariff applicable to Raj West project will be fixed at Rs 2.43/ unit. The company has filed a petition with APTEL seeking a stay on this order. This tariff, if allowed, would lead to a onetime loss of Rs 780mn.

Raj West units 5-8 are expected to be commissioned by FY13 end. There has been a delay in commissioning as the company has not yet received clearances for enhancing production in the attached lignite mines. During the quarter the company sold 313mn units to JSW Steel under conversion agreement. It has banked 272mn units which will be sold in Q3 and Q4. Also, 84mn units have been sold under reverse banking arrangement during this quarter. South African mining operations (SACMH) reported a loss of Rs 180mn during the quarter. Total coal sales during the quarter were 72k tones. Barmer Lignite Mining Corp. Ltd. (BLMCL) reported a marginal profit of Rs 10mn for the quarter. At the end of 2Q the company had outstanding buyers credit of USD 333mn out of which 34% has been hedged. Going forward the management intends to keep buyers credit at similar level and hedge 50% of its exposure.

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JSW ENERGY : RESULTS REVIEW 2QFY13 Quarterly Financials - Snapshot

(Rs mn) Total sales Fuel Expenses Employee Expenses (Inc)/Dec in Banked energy Other Operating Expenses EBITDA Interest Cost Depreciation Other Income FX Gains / (Loss) PBT Tax PAT FX (Gains) / Loss APAT Source: Company, HDFC Sec Inst Research 2QFY13 20,394 10,999 313 (978) 4,663 5,769 2,281 1,605 824 925 3,261 721 2,540 (925) 1,615 2QFY12 9,656 7,616 231 (1,213) 2,149 1,182 1,510 1,098 1,018 (868) (1,586) (481) (1,089) 868 (221) NM NM 388 YoY (%) 111 1QFY13 21,552 11,547 313 1 4,461 5,834 2,426 1,697 1,128 (2,325) 150 160 34 2,325 2,359 (32) NM (1) QoQ (%) (5)

Realisations strong, fuel costs on way down

Merchant realisation Average realisation 5.5 4.5 3.5 2.5 1.5 Average fuel cost

PLF remains high

Ratnagiri 120% 100% 80% 60% 40% 20% 0% Vijaynagar Barmer

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY11

4QFY11

2QFY12

3QFY12

1QFY13

3QFY11

1QFY12

Source: Company, HDFC Sec Inst Research

4QFY12

2QFY13

Source: Company, HDFC Sec Inst Research

2QFY13

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JSW ENERGY : RESULTS REVIEW 2QFY13

Valuation and recommendation

Merchant tariff (Rs/kwh)

JSW Energy remains a play on movements in merchant tariffs, USD-INR exchange rate and international coal prices.

Sensitivity of TP to merchant tariffs and coal price

Coal price in US$ per tonne 80 3.5 4.0 47 64 90 42 58 75 100 36 53 69

Further upsides from CMP will only be possible if coal prices go down further and/or INR appreciates against USD. We dont expect merchant rates in South India to
sustain at high levels and expect them to get in line with rest of India once Southern grid gets synchronized with NEW grid in Jan-14.

4.5 80 Source: Company, HDFC Sec Inst Research

Sensitivity of TP to exchange rate and coal price

INR USD exchange rate Coal price in US$ per tonne 80 45 50 70 64 90 68 62 56 100 66 60 54

We have assumed long term merchant tariffs of Rs 4/unit, INRUSD rate of Rs 50 and long term coal price of USD 80/tonne for our DCF based valuation. We revise our SOTP based target price marginally upwards to Rs 64 due to change in our USD-INR exchange rate assumption from 51.5 to 50. Maintain OPF.
Capacity (MW) 1,200 1,080 860 Value per share 23 11 25 1 4 64

55 59 Source: Company, HDFC Sec Inst Research

SOTP valuation
Ratnagiri Raj West Vijaynagar JPTL Net Cash Target Price

Source: HDFC Sec Inst Research

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JSW ENERGY : RESULTS REVIEW 2QFY13

Income Statement
Rs mn Revenue Growth % Fuel costs Employee expenditure Other expenses EBITDA EBITDA % EBITDA Growth % Other Income Depreciation EBIT Interest Forex (loss) / gain PBT Tax PAT Adjustments Minority interest PAT after minority interest APAT APAT growth % EPS EPS growth %
Source: Company, HDFC Sec Inst Research

Balance Sheet
FY11 43,021 23,721 486 3,067 15,747 36.6 1,255 2,668 14,334 4,325 (30) 9,979 1,562 8,418 30 (1) 8,417 8,446 5.2 FY12 61,188 42 36,541 905 9,292 14,451 23.6 (35.5) 1,466 5,033 10,884 7,172 (1,613) 2,099 419 1,680 1,613 6 1,685 3,298 (61.0) 2.0 (61.0) FY13E 70,009 14 35,439 1,176 7,475 25,920 37.0 56.8 1,759 6,330 21,349 8,538 0 12,811 2,569 10,243 0 55 10,298 10,298 212.2 6.3 212.2 FY14E 78,420 12 34,925 1,529 8,418 33,548 42.8 15.5 1,935 7,556 27,928 9,868 0 18,060 3,651 14,409 0 55 14,464 14,464 40.5 8.8 40.5 FY15E 78,038 (0) 35,102 1,988 8,283 32,666 41.9 (2.2) 2,129 7,556 27,239 8,920 0 18,319 3,678 14,641 0 55 14,696 14,696 1.6 9.0 1.6 Rs mn Share Capital Reserves TOTAL SHAREHOLDERS FUNDS Minority Interest TOTAL DEBT Deferred Taxes Long Term Provisions TOTAL SOURCES OF FUNDS APPLICATION OF FUNDS Gross Block Net Block CWIP Investments LT Loans & Advances CURRENT ASSETS Inventories Trade receivables Cash & equivalents ST Loans & Advances TOTAL CURRENT ASSETS CURRENT LIABILITIES Trade Payables Other Current Liabilities Provisions TOTAL CURRENT LIABILITIES TOTAL APPLICATION OF FUNDS 9,704 11,777 1,973 23,454 152,594 25,289 14,222 1,516 41,027 151,961 20,058 14,222 1,516 35,796 171,667 18,178 14,222 1,516 33,916 174,089 18,212 14,222 1,516 33,950 176,742 5,348 7,645 9,779 1,509 24,751 7,658 11,760 6,686 2,824 29,046 9,213 12,827 19,321 2,824 44,304 8,496 13,411 24,591 2,824 49,440 8,517 13,363 29,401 2,824 54,224 73,982 64,242 70,491 4,842 11,552 124,268 109,450 36,702 4,971 12,525 164,018 142,870 2,500 4,971 12,525 169,478 140,774 0 4,971 12,525 174,938 138,678 0 4,971 12,525 FY11 16,401 40,364 56,765 724 93,221 1,562 323 152,594 FY12 16,401 40,600 57,001 500 92,883 1,292 286 151,961 FY13E 16,401 48,404 64,805 924 104,361 1,292 286 171,667 FY14E 16,401 59,399 75,800 1,403 95,308 1,292 286 174,089 FY15E 16,401 70,572 86,972 1,936 86,256 1,292 286 176,742

Source: Company, HDFC Sec Inst Research

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JSW ENERGY : RESULTS REVIEW 2QFY13

Cash Flow
Rs mn PAT from operations Finance costs Depreciation Working capital change Others OPERATING CASH FLOW Capex Free Cash Flow Investments & Others INVESTING CASH FLOW Capital issuance Debt issuance Interest Dividend Others FINANCING CASH FLOW NET CASH FLOW Closing cash FY11 8,417 4,325 2,668 (4,467) (2,050) 8,892 (27,341) (18,449) (8) (27,349) 0 17,591 (4,071) (1,802) 0 11,718 (6,003) 9,779 FY12 1,685 7,172 5,033 6,323 73 20,287 (18,833) 1,454 (233) (19,066) 0 3,571 (7,196) (1,906) 0 (5,532) (3,447) 6,686 FY13E 10,298 8,538 6,330 (7,852) (55) 17,258 (5,548) 11,710 0 (5,548) 0 11,902 (8,538) (2,384) (55) 925 12,636 19,321 FY14E 14,464 9,868 7,556 (1,747) (55) 30,086 (2,960) 27,126 0 (2,960) 0 (8,574) (9,868) (3,359) (55) (21,856) 5,270 24,591 FY15E 14,696 8,920 7,556 60 (55) 31,176 (5,460) 25,716 0 (5,460) 0 (8,519) (8,920) (3,413) (55) (20,907) 4,809 29,401

Key Ratios
FY11 PROFITABILITY % EBITDA margin EBIT margin APAT margin RoE RoCE EFFICIENCY Tax rate % Inventory (days) Debtor (days) Payables (days) Cash conversion cycle (days) Debt/EBITDA (x) Net D/E Interest coverage VALUATION EPS (Rs/sh) BV (Rs/sh) P/E P/BV EV/EBITDA EV/Revenues Dividend yield (%) 5.2 34.6 12.3 1.8 11.9 4.4 1.6 2.0 34.8 31.6 1.8 13.2 3.1 0.8 6.3 39.5 10.1 1.6 7.3 2.7 2.0 8.8 46.2 7.2 1.4 5.2 2.2 2.8 9.0 53.0 7.1 1.2 4.9 2.1 2.8 16 82 65 149 (2) 5.9 1.5 3.6 20 76 70 253 (106) 6.4 1.5 2.0 20 95 67 207 (45) 4.0 1.3 3.0 20 89 62 190 (39) 2.8 0.9 3.4 20 89 63 189 (38) 2.6 0.7 3.7 37 33 20 15 6 24 18 5 6 5 37 30 15 17 9 43 36 18 21 11 42 35 19 18 10 FY12 FY13E FY14E FY15E

Source: Company, HDFC Sec Inst Research

Source: Company, HDFC Sec Inst Research

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JSW ENERGY : RESULTS REVIEW 2QFY13

Rating Definitions BUY OUTPERFORM UNDERPERFORM SELL : : : : Where the stock is expected to deliver more than 15% returns over the next 12 months' period Where the stock is expected to deliver 0 to 15% returns over the next 12 months' period Where the stock is expected to deliver (-) 10% to 0% returns over the next 12 months' period Where the stock is expected to deliver less than (-)10% returns over the next 12 months' period

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