Edelweiss's research report on JSW EnergyWe downgrade JSW Energy (JSW) to ‘HOLD’ from ‘BUY’ post a 13% surge in the stock today since we find the risk-reward evenly balanced. Our rationale is: (a) even building in benefits of the potential 750MW 3-year medium-term contract, FY17/18E EPS gets revised down 11.5% each—our numbers are now below consensus; (b) our revised SOTP-based target price of INR77 (earlier INR83) indicates marginal downside; and (c) we concede JSW is pursuing an interesting inorganic growth strategy, but this may entail additional risk if acquisition targets do not have PPA/pass through coal linkages. Positives in the stock are now more to do with further correction in thermal coal prices or pushback in inorganic growth.
Outlook & valuations: Balanced risk-reward; downgrade to ‘HOLD’
Based on our revised EPS, the stock is trading at P/E of 10.2x FY17E and 9.5x FY18E— the stock’s mid-quartile band. On the positive, the trading band can move up to that of NTPC as and when JSW is able to get coal pass through in tariff; however, current visibility on the same is limited. Additionally, declining thermal coal prices can also boost EPS. Given our estimates on target price of INR77/share, we perceive marginal downside potential. Downgrade to ‘HOLD’.
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