CMP: INR62 TP: INR88 (+42%) Buy Weak demand and higher fuel cost impact performance

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1 BSE SENSEX S&P CNX 29,921 9,314 Bloomberg JSW IN Equity Shares (m) 1,640 M.Cap.(INRb)/(USDb) / Week Range (INR) 86/54 1, 6, 12 Rel. Per (%) -2/-14/-25 Avg Val, INR m 288 Free float (%) 25.0 Financials & Valuations (INR b) Y/E Mar E 2019E Net Sales ,084.2 EBITDA PAT EPS (INR) Gr. (%) BV/Sh (INR) RoE (%) RoCE (%) P/E (x) P/BV (x) Estimate change TP change Rating change 2 May 2017 Q4FY17 Results Update Sector: Utilities CMP: INR62 TP: INR88 (+42%) Buy Weak demand and higher fuel cost impact performance Merchant capacities at discount to replacement cost; Reiterating Buy s (JSWE) 4QFY17 EBITDA was down 48% YoY/11% QoQ to INR5.9b (est. of INR6.5b) due to lower generation (demand), shutdown at Ratnagiri and higher fuel cost. PAT was down 92% YoY/+13% QoQ to INR242m. For FY17, EBITDA declined 20% YoY to INR33b, while PAT fell 55% YoY to INR6.3b. Blending domestic coal provides hedge against coal prices: Blending domestic coal up to 50% at Ratnagiri and Vijaynagar would help if international coal prices are upwards of USD70-75/t (subject to e-auction coal prices; Exhibit 3, 4 and 5). It would act as a hedge against rising coal prices. PPA for 200MW at Karcham Wangtoo soon: Of the contracted capacity of 704MW, PPA for 200MW was pending approval of capital cost by CERC (on March ). The PPA is now expected soon (likely with Punjab). Likelihood of extension of short-term PPA at Vijaynagar: According to management, the 650MW PPA with Karnataka could be extended (expires by May 2017) as power availability from state gencos has reduced due to water shortage and maintenance. We estimate Vijaynagar to run at 50% PLF and realization of INR3/kWh for FY18, as we believe the extension, if any, will be for a very short period due to addition of new generation/transmission capacities. Merchant assets available at discount to replacement cost; Move to FY19E; Buy: We have upgraded EBITDA by ~5% to ~INR35b and PAT by ~2x to INR2.9b for FY19E on marginally higher merchant realization and lower interest cost. Bina and JPL acquisitions are included in our forecast. At current stock price, JSWE s merchant capacities are valued at ~INR40m/MW (Exhibit 7), at a discount to replacement cost of INR60m/MW. Balance sheet is strong at 1.4x D:E, with annual FCF (postinterest) generation of INR11-14b on support from contracted capacities. We roll forward to FY19E valuation at SOTP-based TP of INR88 (Exhibit 6). Reiterate Buy. Quarterly Performance (Consolidated) Y/E March FY16 FY17 FY16 FY17 FY17 vs Est 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 4QE (%) Net Sales 21,070 25,314 26,491 26,814 24,500 20,470 19,043 18,621 99,690 82,634 19,696-5 YoY Change (%) Total Expenditure 12,897 15,332 14,579 15,436 13,328 10,843 12,468 12,752 58,244 49,391 13,167-3 EBITDA 8,173 9,983 11,913 11,378 11,173 9,627 6,575 5,869 41,446 33,244 6, Margins (%) Depreciation 1,984 2,240 2,650 2,627 2,398 2,471 2,444 2,379 9,502 9,692 2,487-4 Interest 2,640 3,511 4,491 4,389 4,293 4,356 4,229 3,970 15,032 16,848 4,030-2 Other Income ,100 2, PBT before EO expense 4,239 5,129 5,035 4,610 4,899 3, ,013 8, Extra-Ord expense 0-1, , PBT 4,239 6,629 5,035 4,610 4,899 3, ,513 8, Tax 1,155 1,537 1,816 1,543 1,248 1, ,051 2, Rate (%) MI and Associates Reported PAT 2,775 4,920 3,206 3,054 3,665 2, ,955 6, Adj PAT 2,775 3,767 3,206 3,054 3,665 2, ,897 6, YoY Change (%) Sanjay Jain (SanjayJain@MotilalOswal.com); Dhruv Muchhal (Dhruv.Muchhal@MotilalOswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Operating highlights Generation was down 32% YoY/13% QoQ to 4.01BU. Rpt. realization was higher 1% YoY/8% QoQ to INR4.3/kWh. Unit fuel cost (ex-hydro) was up 27% YoY/9% QoQ to INR2.74/kWh. Exhibit 1: Operating highlights FY16 FY17 YoY QoQ 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q % % Standalone Units MU 2,979 3,468 3,644 3,812 3,279 2,232 2,334 2, Realization INR/kWh Fuel cost INR/kWh Other cost INR/kWh EBITDA INR/kWh Consolidated Rpt. Realization INR/kWh Fuel (ex-hydro) INR/kWh Exhibit 2: Generation and PLFs FY16 FY17 YoY QoQ 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q % % Ratnagiri MU 1,574 2,038 1,955 2,078 1,987 1,699 1, Deemed PLF % Vijaynagar MU 1,405 1,430 1,689 1,734 1, , Deemed PLF % Barmer MU 1,501 1,504 1,715 1,676 1,434 1,377 1,628 1, Deemed PLF % Hydro MU ,702 2, Deemed PLF % Total 4,480 5,557 5,968 5,894 6,415 5,956 4,644 4, Conference call highlights Demand and UDAY: The impact of UDAY is getting visible. The ability of discoms to pay has improved. As financial health improves their off-take is also expected to increase. Expect more medium term PPA as demand improved, led by UDAY. Uttar Pradesh has announced aggressive plans to ensure 24x7 power supply in the state in the next 1-2 years which should drive strong increase in demand. Blending of coal: JSWE has received permission to blend domestic coal up to 50%. The formal letter is however still pending. Interest cost: Borrowing cost is expected to decline to 9.5% by FY18 on replacing costlier bank loans with bonds and refinancing. It was 10.17% in FY19. Bina acquisition: The long-stop date for acquisition of Bina is likely to be extended by a couple of months. The delay is due to JP Power going under SDR. UP cancels long-term PPA: UP has cancelled by bids for the 2.8GW long-term PPA. It is likely to come out with a large medium term PPA contract. Karnataka state genco generation has reduced: on water shortage at Bellary power plant and likely maintenance shutdown at one of the state s hydro power plant. 2 May

3 Exhibit 3: Generation cost at Richards Bay USD70/t Vijaynagar Ratnagiri FoB Richards Bay USD/t Freight USD/t Import Duty % Insurance % CIF USD/t USDINR CIF INR/t 5,249 5,249 Port handling INR/t Coal cess INR/t Inland transportation INR/t Landed cost INR/t 6,749 5,949 GCV Kcal/kg 6,000 6,000 Generation cost (ex-bus) INR/kWh Exhibit 4: Vijaynagar generation cost based on domestic e-auction coal Source: MOSL WCL SECL MCL Pit-head coal cost INR/t E-auction coal cost INR/t Royalty + DMF INR/t Coal cess INR/t Sizing and transport INR/t Ex-mine coal cost INR/t 1,598 1,598 1,598 Transport cost INR/t 1,725 2,580 2,110 Rail loading/unloading INR/t Rail km x 850 1, rate INR/km Sea freight INR/t Landed cost of coal INR/t 3,323 4,178 3,708 GCV of coal Kcal 3,100 3,100 3,100 SHR x 2,350 2,350 2,350 Specific cons. kg/kcal Generation cost INR/kWh Generation cost (ex-bus) INR/kWh Exhibit 5: Ratnagiri generation cost based on domestic e-auction coal WCL SECL MCL Pit-head coal cost INR/t E-auction coal cost INR/t Royalty + DMF INR/t Coal cess INR/t Sizing and transport INR/t Ex-mine coal cost INR/t 1,598 1,598 1,598 Transport cost INR/t 1,725 2,580 1,310 Rail loading/unloading INR/t km x 850 1, rate INR/km Sea freight INR/t Landed cost of coal INR/t 3,323 4,178 2,908 GCV of coal Kcal 3,100 3,100 3,100 SHR x 2,350 2,350 2,350 Specific cons. kg/kcal Generation cost INR/kWh Generation cost (ex-bus) INR/kWh May

4 Exhibit 6: SOTP valuation MW FY17E FY18E FY19E FY20E Remarks NPV of PPAs 3, ,706 DCF, 12% CoE, debt:equity 75:25 Merchant capacity 2,613 INR60m/MW FY20E JSW Power Trading x invested equity Jaigarh Power Transco 5,919 5,919 5,919 5,919 6x FY16 EV/EBITDA Barmer Mining x FY16 networth JSW Steel 14,008 15,408 16,949 18,644 Current market price Total value 344,908 Less: Net Debt 181,055 Equity value (FY20E 14%) 126, , ,853 No. of shares (mn) 1,628 1,628 1,628 Value per share (INR/sh) Exhibit 7: Merchant capacities available at discount to replacement cost INR b Capacity INR m MW MW Market capitalization 109 Net debt FY Enterprise value 290 Less: Power trading 1 Jaigarh Transco 6 Barmer Mining 0 JSW Steel 19 Implied EV of generation assets 265 5, Less: NPV of long-term PPAs 163 3, Implied EV of merchant assets 102 2, May

5 Financials and Valuations Income Statement (INR Million) Y/E Mar E 2019E Net Sales 61,188 89,343 87,054 93,802 99,689 82,634 90, ,421 Change (%) EBITDA 14,478 27,932 32,514 36,234 41,446 33,243 31,976 34,873 EBITDA Margin (%) Depreciation 5,033 6,615 8,100 7,898 9,502 9,692 10,920 12,560 EBIT 9,444 21,317 24,415 28,337 31,944 23,552 21,056 22,313 Interest 7,172 9,628 12,059 11,375 15,032 16,848 17,346 19,604 Other Income 1,466 2,134 2,022 2,301 2,100 2,170 1,387 1,590 Extraordinary items -1,613-1,966-3, , PBT 2,125 11,857 10,600 18,921 20,513 8,874 5,097 4,299 Tax 419 2,733 2,836 5,150 6,051 2,690 1,376 1,161 Tax Rate (%) Min. Int. & Assoc. Share Reported PAT 1,701 9,037 7,547 13,495 13,955 6,290 3,445 2,863 Adjusted PAT 1,701 9,037 7,547 13,495 13,955 6,290 3,445 2,863 Change (%) Balance Sheet (INR Million) Y/E Mar E 2019E Share Capital 16,401 16,401 16,401 16,401 16,401 16,280 16,280 16,280 Reserves 40,600 45,637 49,311 58,780 68,958 87,405 87,133 86,279 Net Worth 57,001 62,038 65,712 75,180 85, , , ,558 Debt 121, , , , , , , ,202 Deferred Tax 1,292 1,524 1,933 2,930 4,383 5,801 6,107 6,365 Total Capital Employed 179, , , , , , , ,320 Gross Fixed Assets 124, , , , , , , ,453 Less: Acc Depreciation 14,818 21,335 30,006 38,047 47,304 56,996 67,916 80,476 Net Fixed Assets 109, , , , , , , ,977 Capital WIP 36,702 9,772 6,146 4,536 7,265 5,269 5,269 5,269 Investments 2,871 2,714 2,535 2,327 1,932 13,599 13,599 13,599 Current Assets 43,671 52,062 47,416 55,430 56,344 72,115 66,293 69,297 Inventory 7,658 4,415 4,158 5,483 6,494 5,967 5,485 6,535 Debtors 10,640 18,487 11,976 11,723 28,381 21,828 14,958 17,823 Cash & Bank 8,786 10,825 12,016 17,376 4,701 10,032 11,563 10,652 Loans & Adv, Others 16,587 18,334 19,266 20,849 16,767 34,288 34,288 34,288 Curr Liabs & Provns 13,084 19,041 9,653 10,416 17,717 17,178 16,317 17,271 Curr. Liabilities 11,336 14,837 5,449 6,062 13,322 16,616 15,754 16,709 Provisions 1,748 4,204 4,204 4,353 4, Net Current Assets 30,588 33,021 37,763 45,014 38,627 54,937 49,977 52,026 Total Assets 179, , , , , , , ,320 2 May

6 Financials and Valuations Ratios Y/E Mar E 2019E Basic (INR) EPS Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation(x) P/E Cash P/E Price / Book Value EV/Sales EV/EBITDA Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios (%) Asset Turnover (x) Debtors (No. of Days) Inventory (No. of Days) Leverage Ratios (%) Net Debt/Equity (x) Cash Flow Statement (INR Million) Y/E Mar E 2019E Adjusted EBITDA 14,478 27,932 32,514 36,234 41,446 33,243 31,976 34,873 Non cash opr. exp (inc) 312-1,185-2, ,080-10, (Inc)/Dec in Wkg. Cap. 6,323-6,874-4,894 1,322-4,855 5,429 6,491-2,960 Tax Paid ,627-2,588-4,489-2,998-2,690-1, Other operating activities CF from Op. Activity 20,287 17,246 22,691 33,929 35,673 25,042 37,397 31,010 (Inc)/Dec in FA & CWIP -18,833-9,783-4,940-6, ,000-28,000-41,000 Free cash flows 1,454 7,464 17,751 27,156 34,981 24,042 9,397-9,990 (Pur)/Sale of Invt Others 632 1,420 2,030 1,475-31, ,387 1,590 CF from Inv. Activity -18,200-8,363-2,910-5,297-32, ,613-39,410 Inc/(Dec) in Net Worth Inc / (Dec) in Debt 3,571 3,819-2,701-8,124 3, ,000 31,000 Interest Paid -7,196-9,710-12,052-11,328-15,036-16,848-17,346-19,604 Divd Paid (incl Tax) & Others -1, ,838-3,820-3,948-3,907-3,907-3,907 CF from Fin. Activity -5,532-6,844-18,591-23,272-15,982-20,755-9,253 7,489 Inc/(Dec) in Cash -3,445 2,040 1,191 5,359-12,675 4,021 1, Add: Opening Balance 12,231 8,786 10,825 12,016 17,376 4,701 10,032 11,563 Closing Balance 8,786 10,825 12,016 17,376 4,701 8,722 11,563 10,652 2 May

7 Corporate profile Company description, a Sajjan Jindal company has a power generation project portfolio of 3.1GW is operational. It has recently approved investment on 240MW hydro power project. It has acquired 1.4GW of hydro power project and is exploring further inorganic growth opportunity. The company is an early entrant in Power Trading business and has presence in Power equipment manufacturing and has established JV with Toshiba for super critical steam turbines and generator. Exhibit 1: Sensex rebased Source: MOSL/Bloomberg Exhibit 2: Shareholding pattern (%) Mar-17 Dec-16 Mar-16 Promoter DII FII Others Note: FII Includes depository receipts Source: Capitaline Exhibit 3: Top holders Holder Name % Holding Life Insurance Corporation Of India 4.9 Steel Traders Limited 3.0 Blackrock Global Funds Asian Dragon Fund 1.7 Indus Capital Group Limited 1.4 Life Insurance Corporation Of India 4.9 Source: Capitaline Exhibit 4: Top management Name Designation Sajjan Jindal Chairman & Managing Director Sanjay Sagar Joint Managing Director & CEO Pramod Menon Director (Finance) Exhibit 5: Directors Name Chandan Bhattacharya Shailaja Chandra Uday Chitale Rakesh Nath Name N K Jain Sheila Sangwan Tanvi Shete Source: Capitaline *Independent Exhibit 6: Auditors Name Lodha & Co S R Bhargave & Co S Srinivasan & Co Type Statutory Cost Auditor Secretarial Audit Source: Capitaline Exhibit 7: MOSL forecast v/s consensus EPS MOSL Consensus (INR) forecast forecast Variation (%) FY FY FY Source: Bloomberg 2 May

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