Decline in costs fuel JSW Energy Q2 earnings, muted demand still a challenge

New Delhi: JSW Energy withstood demand slowdown better, reporting a 5% expansion in operating profit for the September quarter. Net profit rose 11.7% even as customers tempered electricity purchases. The performance impressed the Street, sending the stock up 5.7% in early deals on Monday.

Earnings got a boost from low fuel and finance costs and strong performance in the hydro division. Tracking the fall in imported coal prices, fuel costs declined 26%. The fall in fuel costs weighed on realization and revenues, which fell 13% from a year ago, but this was offset by a reduction in debt and an 11.7% fall in finance costs. Also, thanks to better availability of water, hydro power plants did well clocking superior utilization levels.

On the face of it, the performance looks decent, especially as it comes in the backdrop of a country-wide decline in generation in the September quarter. Comparatively, electricity generation at JSW Energy rose 0.4%.

But dig deeper and the impact of subdued demand conditions are hard to ignore.

Utilization levels at two of the company’s thermal power plants were hit by lower offtake by power distribution companies, large buyers of electricity in India. Reflecting the subdued demand conditions, tariffs in the spot electricity market also fell considerably. “Energy demand in Q2FY20 was broadly flat, and offtake from long term contracts fell ~2%. Consequently, even though merchant sales more than doubled, we estimate average realization fell by ~17%, which dragged down revenue by ~13%,” SBICAP Securities Ltd said in a note.

Meanwhile, the company’s inorganic growth strategy has helped underpin investor sentiment. JSW Energy has shortlisted purchase of two troubled thermal power plants constituting 1,750 megawatt (MW).

The company aims to achieve generation capacity base of 10,000 MW in three-five years, providing growth visibility for investors. How the company manages to achieve this (valuations and mix of additions) will be crucial. “While we are convinced about JSW Energy’s expertise in turning around the stressed assets and putting money to good use, we await clarity on valuations and the deal’s finer details,” analysts at Edelweiss Securities Ltd said in a note.