Fear trumps optimism at JSW Energy

Operating profit and net profit fell 40-92% as high costs crimped profitability at JSW Energy


JSW Energy’s revenue fell 27% due to low demand, while generation volumes are down 31%. Graphic by Naveen Kumar Saini/Mint
JSW Energy’s revenue fell 27% due to low demand, while generation volumes are down 31%. Graphic by Naveen Kumar Saini/Mint

The JSW Energy Ltd stock slumped 7% on Tuesday after the company reported weaker-than-expected performance for the March quarter. Revenue fell 27% due to low demand. Generation volumes are down 31%.

Operating profit and net profit fell at an even faster pace of 40-92% as high costs crimped profitability. This is the third consecutive quarter JSW Energy reported a drop in revenue and profit.

At the core of the issue is demand. Roughly a third of the company’s plants don’t have long-term power purchase agreements (PPAs). It is trying to run these plants through short-term contracts. But the lack of sufficient buyers and excess capacities in the system means supply is outstripping demand. Short-term and merchant power prices are on a downward spiral. This is exerting pressure on JSW Energy’s realizations and profitability.

The company depends on imported fuel, which is expensive. It plans to reduce costs through blending domestic coal. Further, the management sounded optimistic about prospects. In a conference call with analysts, the management said it is beginning to see the benefits of the central government sponsored UDAY (Ujwal Discom Assurance Yojana), the revival plan for state electricity boards (SEBs). Payment cycles are said to have improved.

As the financial condition of SEBs improves and states look to improve power supplies, the management expects demand to rise. Adding to the optimism is Uttar Pradesh’s decision to accelerate round-the-clock electricity availability in the state. It expects other states to follow Uttar Pradesh in improving power supplies, raising electricity demand.

But the Street is not convinced. The correction in the JSW Energy stock intensified after the conference call. The fear is the company may not be able to find sufficient customers for its idle capacities in the near term. Right now, it does not have bilateral power supply contracts for the untied capacities beyond this month. Also, the quantum of benefit with domestic coal blending is not yet known, as the company is awaiting an official nod.

So, as short-term power rates are expected to remain low tracking excess supplies, JSW Energy’s realizations are feared to be hit further in the near future. “The near-to-medium term earnings outlook is clouded due to open merchant capacities and over-supplied power market,” Motilal Oswal Securities Ltd said in a note released before the conference call.

The management, however, tried to allay the fears, saying the future is not going to be as gloomy as the last couple of quarters. It expects to see more medium-term PPAs as demand from Uttar Pradesh and other states picks up. But as the steep correction in the stock indicates, conviction is low right now. More clarity on demand revival and PPAs may help improve sentiments.

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