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Ideas for Profit | JSW Energy: High cash balance, low debt make it an attractive power play

December 12, 2018 / 05:15 PM IST

Jitendra Kumar GuptaMoneycontrol Research


Highlights:
- Strong balance sheet backed by cash in the books and low debt
- Scope for improvement in return ratios led by improvement in profitability
- Higher merchant tariffs and demand for power to drive earnings- Easing international coal prices to add to profitability

Among private power generation companies, JSW Energy is probably the only one sitting on cash as most of the others are suffering from a liquidity crunch. This provides a huge advantage at a time when the power sector is consolidating.

JSW Energy has bought several assets in the past, including power plants of Jaypee Group and Jindal Steel & Power. Now it has emerged as the sole bidder for assets of Monnet Power, which has 1,050 MW of operational capacity supplying power to Monnet Ispat - a company acquired by JSW Steel.


Effective utilisation of cashWhile the details of the bidding for Monnet Power's assets are not known, if JSW Energy manages to acquire them, it could reap strategic benefits. These assets will allow it to leverage its balance sheet effectively.

As of now, the company is sitting on cash and investments of close to Rs 3,000 crore and its net-debt-to-equity ratio is around one time, which is one of the lowest in the industry. If resources are used to acquire these assets at attractive prices, it could improve return ratios.

JSW Energy is currently generating a return on capital of around 9 percent, which is quite low.


Improving demand environmentWhile it would take time for changes in the composition of the company's capital and balance sheet to reflect in its profitability, the positive impact of the recent recovery in both domestic merchant power demand and tariffs would be seen in coming quarters. The company sold close to 20 percent power it produced in the open market at merchant power rates, which have risen by close to 35 percent so far this year.

This is also reflected in the company's Q2 FY19 consolidated realisations, which rose 9 percent on year (18 percent growth in merchant realisations) to Rs 3.64 per unit, along with a 9.1 percent rise in volumes led by higher plant load factor across its plants.


Easing cost pressureThe other comforting factor for the company is the recent correction in international coal prices. JSW Energy procures thermal coal from the spot market for close to about 50 percent of its total power generation capacity of 4,500 mw. Over the last few months, international coal prices have dropped from a high of $125 a tonne in July to around $95 a tonne at present.


ValuationsAt Rs 66.4 per share, JSW Energy is trading at 15 times its FY19 estimated earnings, which is quite reasonable considering the strength of its balance sheet, earnings viability and scope for improvement in return ratios. One should also look at the Rs 1,000 crore annual free cash flows generated by the business. Interestingly, this is why the stock is trading at only seven times its cash earnings.

For more research articles, visit our Moneycontrol Research page

Jitendra Kumar Gupta Principal Research Analyst

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