Here Is Why:
- The company stands to benefit from the surge in spot electricity prices.
- It has high levels of fuel security, which is reflected in its plant load factor of over 80 per cent.
- Its financial performance is expected to improve as the rupee gains strength. The new capacity will start adding revenues from the next quarter.
Basic economics has it that demand and supply determine prices, and this is the basic premise on which we are recommending JSW Energy (JSWEL) . So far this year, the monsoon has been weak, which has seen NHPC report a five to 10 per cent decline in the power that it has generated. In our energy-deficient country, lower power generation means a further widening of the gap between demand and supply. Under such circumstances, JSW Energy stands to benefit due to its business model. Though the power sector is currently under pressure, there are a few factors that make JSWEL an attractive buy.
Traditionally, power generators sell most of the power through long-term agreements called Power Purchase Agreements (PPAs). JSWEL sells more than half of the power it generates through the merchant sale route and the rest through PPAs. This is a slightly risky bet. However, we believe that power deficits will not go away immediately, and hence, the demand is always likely to be there. Also, due to the higher demand, spot electricity prices have recently surged to Rs 5-7 per unit from levels of Rs 3.50-4 per unit. In fact, it reached as high as Rs 11-12 per unit in July.
JSWEL has plans to set up projects to generate 11770 MW of power in total, of which 2600 MW of capacity is already operational. It expects to commission another 540 MW by the second quarter of the current fiscal. The remaining 8630 MW of capacity is under development. Among its other businesses are power trading as well as coal and lignite mining through the mines it owns. Power generation, though, is a major revenue contributor, which brings in 81 per cent of the topline. The rest comes from other operations.
JSWEL seems to have high levels of fuel security even at a time when this is a major headache for most other power producers. The company generates 21 per cent electricity through lignite, for which it has captive mines. 79 per cent of its capacity is fired using blended imported coal from Indonesia and South Africa. The 540 MW capacity that will be added soon has fuel linkages with its existing lignite mines. While the international coal prices have corrected by about 30 per cent in last one year, the Indian currency has depreciated by 26 per cent during same period, taking away the advantage. However, the rupee is expected to strengthen from here on, which will be an advantage for JSWEL. As the new capacity goes live, power generation will rise, and hence, the revenues will also surge.*To get the password for buy calls, please subscribe to this blog. You will receive the password in next email to you*