The stock of power generator JSW Energy has gained 45 per cent since January . This seems to have been driven by the sharp 70 per cent jump in profit in the first half of this fiscal — an outcome of easing global coal prices and a stable rupee. Also, JSW Energy’s recent proposal to acquire JP Power Ventures’ 1,391 MW of operational hydro power projects buoyed the stock.

Still, at ₹82, the JSW Energy stock trades cheap at 1.6 times its estimated book value for 2015-16 as against its five-year average historical valuation of 2.2 times. So, there could be further upside.

JSW Energy, which meets 65 per cent of its fuel requirement through imports, should continue to benefit from the weakness in international coal prices. Also, the proposed deal with JP Power Ventures could add significantly to the power generation capacity. But, there are a few things to watch out for such as the final purchase price that the company pays for the acquisition and resolution of the regulatory uncertainty surrounding the 1,091 MW Karcham Wangtoo plant.

Cost relief

Over 85 per cent of JSW Energy’s revenue comes from the sale of power produced.

While the power plants at Vijayanagar in Karnataka and Ratnagiri in Maharashtra are run on imported coal, the one at Barmer in Rajasthan is fuelled by the captive Kapurdi lignite mines. With subdued demand for coal, particularly from China, likely to keep global prices of the fuel in check, the company can expect continued relief on the coal cost front. JSW Energy’s forex outgo of ₹2,792 crore, largely driven by coal imports, was a third of its consolidated revenues in 2013-14.

The recent Government approval for increasing the capacity of the Kapurdi mines also bodes well for the company.

JSW Energy sells about half its power produced under long-term power purchase agreements and the other half in the merchant market. While the exposure to the merchant market exposes it to tariff volatility and buyer uncertainty, the impact of the same may average out over a longer period of time.

For instance, lower power sales volumes in the merchant market, despite overall higher realisations, led to a 3 per cent revenue fall in 2013-14. However, in 2012-13, higher power sales and better merchant market realisations helped revenue jump 46 per cent.

So far, for the half-year ended September 2014, JSW Energy has reported an increase in power sales — 23 per cent higher in the merchant market and 34 per cent higher under long-term power purchase agreements

To shield itself from the uncertainty in merchant tariffs, the company has been reducing the share of sales in this market, which is down to 50 per cent from 64 per cent in 2011-12.

Diversifying assets

If JSW Energy’s proposed acquisition of JP Power Venture’s two hydro power plants goes through, it would raise its current operational capacity from 3,140 MW (all thermal) to 4,531 MW (thermal and hydro) and will immediately add to revenue.

The two hydro power plants, which together generated revenue of ₹1,562 crore in 2013-14 for JP Power Ventures, would also help JSW Energy diversify its power generation portfolio.

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