JSW Reports Margins Expansion

JSW energy has reported a net profit of Rs 218 crore for the first quarter of the current fiscal against a loss of Rs 1 crore in the corresponding quarter of the last fiscal. The company also reported 13% growth in revenues.

The results are very surprising as the company has achieved this growth despite having given a disappointing outlook in the last quarter. Besides, it should be noted that the company imports coal for power generation and rupee depreciation was expected to hurt its margins. For the quarter, the company has recorded EBITDA margins of 37.96% against 27% in the previous fiscal’s quarter. In fact, these margins are one of the best in its history.

Fuel cost during the quarter declined by 8% and as a percentage of sales too, this cost item has shown a decline of about 10%. Thanks to this decline, the total expenses of the company also showed a remarkable decline leading to the rise in the EBITDA margins.

For the quarter, the company sold total 4980 million of units of energy against 4371 units sold a year ago. Its blended realisations per unit of electricity sold for the quarter were at Rs 5.23 against Rs 4.9 a year ago. The company, however, has guided that there would be some decline in the merchant revenues going ahead due to the increase in generation capacity in the country. It has said that the merchant tariffs in the Southern part of India would remain better than the rest of the country due to the congestion in the transmission corridor.

The company has welcomed the move of the debt restructuring of DISCOMs but has cited questions on policy-related issues pertaining to the standard bidding documents and fuel availability.

On the outlook, it has said that next quarter (Q2FY14) would remain under pressure due to a rise in the depreciation of the rupee which will negate the impact of benign coal prices.

The stock, at the CMP of Rs 44, is available at a TTM price to earnings multiple of 6.5x its TTM EPS Rs 6.8. On the EV/EBITDA front, the stock remains cheaper at a TTM multiple of 5.6x. We expect the valuation to remain suppressed due to high imports as well as the issues.

We, however, see some appreciation in the price as historically it was available at a TTM EV/EBITDA multiple of 10x. We can see about 10-15% returns from the stock going ahead and hence recommend a ‘buy’ on the stock at the CMP.