Lights turn dimmer at JSW Energy

Lower utilisation at Vijaynagar leads to uncertainty on earnings

The JSW Energy stock has given up most of the 19 per cent gains it saw from the March low, following a weak March quarter (Q4) performance and worry over a surge in capital expenditure (capex). Earlier, a spurt in merchant power demand and rates had boosted sentiment on the power producer, which sells a large chunk of its output in the shortterm market. In Q4, as rising energy costs affected profit, low utilisation (plant load factor or PLF) has brought back focus on unused capacity. This is leading to uncertainty on earnings, and keeping analysts bearish on the stock. The key pain area in Q4 was its Vijaynagar (Karnataka) plant, 27 per cent of its thermal capacity of 3,140 Mw and a fifth of overall capacity of 4,531 Mw. This plant reported a PLF of 49 per cent, down sharply from 77 per cent in the year-ago quarter. At 52 per cent for FY18, it was the lowest ever in recent times. Positively, healthy merchant power off-take boosted the company's Ratnagiri (Maharashtra) plant's PLF to 64 per cent (from 47 per cent in the year-ago quarter), the Barmer (Rajasthan) plant reported stable operation. Thus, consolidated PLF was at 51.9 per cent versus 51.6 per cent in Q4 of FY17. Clearly, a long-term power purchase agreement (PPA) for Vijaynagar is crucial for the overall show. Analysts at Emkay Global, while factoring in lower PLF for Vijaynagar and assuming lower blended realisation (rates), have cut earnings estimates by 29.3 per cent for FY19 and 21 per cent for FY20. Given the challenge in tying up power, IDFC Securities, too, believes there is a high level of earnings uncertainty. JSW is hopeful of inking longterm PPAs for untied capacities and cut debt by ~31 billion in FY18 from ~112.78 billion. A surge in capex for its foray into electric vehicles and renewable energy equipment-making is keeping the Street cautious, given the impact on near-term earnings and return ratios. Edelweiss says JSW’s plan to diversify into unrelated businesses will raise uncertainty on profitability in the new venture.