JSW Energy: Caught between poor demand and high costs

JSW Energy’s poor Q3 results show it is still exposed to market vagaries and rising concerns about earnings visibility


JSW Energy Ltd stock lost 3% on Monday after the company reported a weak performance for the December quarter. Graphic: Subrata Jana/Mint
JSW Energy Ltd stock lost 3% on Monday after the company reported a weak performance for the December quarter. Graphic: Subrata Jana/Mint

The JSW Energy Ltd stock lost 3% on Monday after the company reported a weak performance for the December quarter. With Monday’s loss, the stock has lost a quarter of its value in the last six months. In sharp contrast, the S&P BSE 500 index is down less than 1% during the same period.

The underperformance reflects investors’ concerns about profitability and the December quarter results underline those worries. Electricity generation is down 23% on plant shutdowns and low power offtake. Utilization levels at the company’s Vijayanagar plant in Karnataka slumped from 96% a year ago to 53% due to the delay in signing of a power purchase agreement (PPA). Another thermal power plant at Ratnagiri in Maharashtra also saw a sharp drop in utilization levels.

JSW Energy depends on imported coal for its fuel requirements and a significant part of the capacities still do not have long-term PPAs. The combination worked well when imported coal prices were low and short-term power prices ruled high in India. But with excess supplies sending short-term power rates to record lows and imported coal prices rising, the company’s profitability came under pressure.

Average realization fell from Rs4.01 a unit in the year-ago quarter to Rs3.98 in the last quarter . As a consequence, margins contracted by nine percentage points. Revenues fell 26%. Profits slumped from Rs309 crore a year ago to Rs21 crore in the December quarter.

Nevertheless, the company started the new year on a positive note. It secured a short-term power supply contract with a Karnataka utility and supplies have commenced. Coal prices, after spiking in October-November last year, softened in recent weeks. While these two factors should help improve performance in the current quarter, the gains can be limited. One, a weak rupee can reduce the benefits of recent softness in coal prices. Two, the current power offtake agreement for the Vijayanagar plant is only till May. Even then, the plant still has free capacity (estimated at 17%) that requires PPAs. Also, the Ratnagiri plant is qualified for a PPA with an Uttar Pradesh utility. But with the state headed for elections, the contract is not expected to be signed in the near future.

So, JSW Energy is still exposed to market vagaries and rising concerns about earnings visibility. “Unless macro variables turn positive (merchant realizations find a floor level, demand picks up leading to higher offtake of open-ended capacity and seaborne thermal prices correct by 30-35% from current levels), spreads on sales from its open-ended coal-fired capacity will settle at a lower level in the medium-term, in turn lowering FCF (free cash flow) generation,” Nomura Research said in a 7 January note.

“Based on the operating metrics for 3Q FY17 and outlook for the current quarter, we expect JSW to just about break even in 2H FY17; accordingly, we cut our FY17F EBITDA/EPS forecast for the company by 11%/39%,” added Nomura. Ebitda is short for earnings before interest, tax, depreciation and amortization. EPS stands for earnings per share.

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