Buy JSW Energy; target Rs 65: Motilal Oswal

"JSW Energy's (JSWEL) performance was hit due to its "converter" business model with open exposure on coal. Correction in global coal prices has improved the situation. CoD of Raj West project (Sep-12) would pave way for final tariff , removing uncertainty on under-recovery for an otherwise regulated return project. This along with group captive will mean offtake mix in favor of regulated projects, reducing earnings volatility. Expect FY12-14 EPS CAGR of 79%. Reasonable valuation (FY14E P/E of 8x, P/BV of 1.2x) and lowest DER among peers (1.5x) provide further comfort."

"Global thermal coal indices are down ~35% since their peak in Dec-10, led by changing US energy dynamics, slowdown in demand from China, etc. Even in INR term, the indices are down by ~17% despite rupee depreciation. JSWEL is a key beneficiary with ~1.5GW merchant capacity located in high-deficit consumption regions. For FY12, JSWEL's standalone reported fuel cost at INR2.84/unit (v/s INR2.53/unit YoY), and we expect moderation over 8-10% over FY13E/14E. We assume average Richard Bay's index at UD90/ton for FY13 and USD88/ton for FY14 v/s current price of below USD85/ton."

"JSWEL is working on 240MW Kutehr hydro project and 270MW expansion at Raj West, and has additional 6.5GW of thermal project pipeline (55% on imported coal). Most of these projects are in the initial stages of construction or final stage of development and thus growth option is limited. Capital allocation to new projects and no diversion to "non-core" business, progress on on-going projects, and fuel/PPA mix remain critical factors. We assign no growth option as would wait for projects to attain critical milestones."

"Expect JSWEL's consolidated EPS CAGR of 79% over FY12-14, driven by fuel cost savings and full year contribution from Raj West in FY14. JSWEL's FY12 net DER is 1.5x (among lowest in peers), which would further moderate over next 2 years. Our FY13 assumptions of USD90/ton RB index and peak PLF of 85% for Ratnagiri/ Vijaynagar projects are reasonable in our view. USD1/ton fall in RB index and currency appreciation of INR1/USD improves FY13/14 PAT by 3%/2% and 6%/3%, respectively. Our SOTP target price of INR65 offers 27% upside. Upgrade to Buy," says Motilal Oswal research eport.

FIIs holding more than 30% in Indian cos

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