JSW Energy disclosed a sharp drop in consolidated net profit for the quarter ended June 2015. During the quarter, the profit of the company declined 14.75% to Rs 2,774.50 million from Rs 3,254.70 million in the same quarter previous year. Revenues for the quarter declined 17.64% to Rs 21,069.90 million, compared with Rs 25,583.20 million for the prior year period.
Commenting on the financial performance, Religare Capital said, ''Q1FY16 was marked by a decline in average PLFs to ~75% (from 84% YoY) due to weak demand and a maintenance shutdown. Consequently, PAT for the quarter dropped 15% YoY to Rs 2.8 billion. With a resumption of operations at Vijayanagar, we expect PLFs to improve, leading to ~5% growth in PAT for FY16E to Rs 14.2 billion.
The demand-supply gap for power has substantially narrowed in JSW's key market of South India, leading to a deficit of only ~2% in FY16 to date. Incremental supply from gas-based plants is likely to further shrink the deficit. This could weaken merchant tariffs, thereby putting earnings from JSW's Vijayanagar plant (41% of our target price) at risk.
Given strong cash flow generation in the last three years, JSW has been able to reduce leverage and adopt an inorganic strategy, marked by hydro asset acquisitions. But, going ahead, the planned acquisition of stress assets (like Monnet) puts JSW at risk of adding a stranded plant to its portfolio and also bumping up leverage and equity dilution.
Our DCF-based Sep'16 TP stands at Rs 95 (implied FY17E P/B of 1.6x). We find the stock fairly valued but note that falling merchant prices present a key downside risk to earnings. Initiate with HOLD."
