Emkay Your success is our success

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1 Emkay Your success is our success January 30, 2014 Rating Sell CMP Rs44 Previous Reco Sell Target Price Rs38 EPS Chg FY14E/FY15E (%) -12/-11 Target Price change (%) -17 Nifty 6,074 Sensex 20,498 Price Performance (%) 1M 3M 6M 12M Absolute Rel. to Nifty Relative price chart Rs Feb-13 Apr-13 Jun-13 Aug-13 Sep-13 Nov-13 Jan-14 Stock Details Sector Bloomberg JSW Energy (LHS) Rel to Nifty (RHS) % Power JSW IB Equity Capital (Rs mn) 16,401 Face Value(Rs) 10 No of shares o/s (mn) 1, Week H/L 73/ 34 Market Cap (Rs bn/usd mn) 71/ 1,138 Daily Avg Volume (No of sh) 1,415,607 Daily Avg Turnover (US$mn) 1.2 Shareholding Pattern (%) Dec'13 Sep'13 Jun'13 Promoters FII/NRI Institutions Private Corp Public Amit Golchha amit.golchha@emkayglobal.com Anujay Jain anujay.jain@emkayglobal.com Financial Snapshot (Consolidated) JSW Energy Earnings downside risks remain; reiterate Sell APAT of Rs2.2bn was much below our expectation largely on account of higher fuel costs at Rs2.64/unit (up 17.5% YoY and 11.6% QoQ). Adjustments to the reported PAT included Rs540mn for impairment loss and forex gain of Rs357mn Management commentary continues to remain weak vis-à-vis past quarters on demand (backing down), indicating PLFs could remain under pressure Factor higher fuel costs - EPS cut by 12%/11% for FY14/15E. In FY15, we continue to see EPS downgrade risks in the form of lower PLFs, higher hedging cost, coal prices firming up and banked energy losses Despite the stock price correcting by 20% we maintain our Sell rating given the EPS downgrade risks, and lower PT to Rs38. Key risk: a significant uptick in merchant prices, unlikely in our view, and/or Barmer tariff approval at Rs4+ Below expectation results JSWE s APAT of Rs2.2bn was much below our expectation of Rs2.9bn largely due to higher fuel costs at Rs2.64/unit (up 17.5% YoY and 11.6% QoQ) vs expectation of Rs2.33/unit. Adjustments to the reported PAT of Rs2.0bn included Rs540mn for impairment loss at SACMH and forex gain of Rs357mn. Operationally, this quarter was weak, as PLFs fell to 63.9% as against 90.5% YoY (due to the back-down and shutdown at units ). However, average realizations at Rs4.85/unit (Rs4.3/unit YoY and Rs4.6/unit QoQ) were slightly better than expected (merchant realization at Rs5.1/unit, flat QoQ, look highly unsustainable to us). JSWE management continues to guide for merchant realizations of Rs 4.5/unit for FY14E. Factor higher fuel costs for FY14/15; earnings downgrade risk s persists for FY15 We factor in higher fuel costs for FY14/15, and hence cut our earnings by 12% and 11% respectively. The overall management commentary on demand continues to remain weak compared with the past few quarters, indicating PLFs could remain under pressure. Based on JSWE management s weak outlook on demand we believe there could be further downside risk to our FY14 and FY15 EPS, resulting from lower PLFs, increase in global coal prices and higher hedging costs, and banked energy losses. FY14 could be peak of earnings; reiterate Sell Despite the stock price correcting 20% over the past one month we maintain our Sell rating on JSWE, given the EPS downgrade risks, coupled with the commodity business model and the poor visibility on earnings for FY16 (PAT Rs5-7bn). In our view, FY14 could be the peak of earnings, and we could see a chance of the recent high of Rs57 becoming a top for the stock. Our revised target price of Rs38/sh (Rs46/sh earlier) is based on 7x FY15E EPS (for which downgrade risks rem ain). At the CMP of Rs44, the stock trades at 8x15EPS. The key risks to our call would be a significant up-tick in merchant prices, though unlikely in our view, and/or Barmer tariff approval at above Rs4. YE- Net EBITDA EPS EPS RoE EV/ (Rsmn) Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA P/BV FY12A 61,188 14, , FY13A 89,343 27, , FY14E 97,252 32, , FY15E 95,471 29, , Result Update Emkay Global Financial Services Ltd. 1

2 Exhibit 1: Results snapshot Rs mn Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 YoY (%) QoQ (%) YTD'13 YTD'14 YoY (%) Revenue 23,652 23,010 24,720 20,246 21, ,568 66, Expenditure (15,283) (15,051) (15,492) (11,868) (13,510) (46,361) (40,870) as % of sales -64.6% -65.4% -62.7% -58.6% -62.8% -69.6% -61.5% Power purchase (2,603) (3,012) (3,521) (1,821) (1,158) (8,470) (6,499) as % of sales -11.0% -13.1% -14.2% -9.0% -5.4% -12.7% -9.8% Fuel cost (10,475) (9,938) (10,623) (10,304) (10,661) (33,021) (31,588) as % of sales -44.3% -43.2% -43.0% -50.9% -49.6% -49.6% -47.5% Banked inventory (401) (550) 409 2,209 (60) ,559 as % of sales -1.7% -2.4% 1.7% 10.9% -0.3% 0.9% 3.8% Employee Cost (323) (319) (347) (347) (334) (949) (1,029) 8.5 as % of sales -1.4% -1.4% -1.4% -1.7% -1.6% -1.4% -1.5% Other expenditure (1,481) (1,231) (1,410) (1,605) (1,298) (4,497) (4,313) -4.1 as % of sales -6.3% -5.3% -5.7% -7.9% -6.0% -6.8% -6.5% EBITDA 8,369 7,959 9,228 8,378 7, ,208 25, Depreciation (1,572) (1,741) (2,008) (2,032) (2,065) 31 2 (4,874) (6,105) 25.3 EBIT 6,797 6,218 7,220 6,346 5, (7) 15,334 19, Other Income ,106 1, Interest (2,364) (2,557) (2,747) (2,927) (3,365) (7,071) (9,039) 27.8 PBT 4,733 4,278 4,926 3,745 3, ,369 11, Total Tax (1,150) (839) (1,244) (860) (790) (2,239) (2,894) 29.2 Adjusted PAT before MI 3,583 3,439 3,681 2,885 2, ,130 8, (Profit)/loss from JV's/Ass/MI (15) (117) (41) (98) (69) 28 (208) APAT after MI 3,568 3,322 3,640 2,787 2, ,158 8,606 Extra ordinary items (464) 35 (1,498) (1,161) (146) (1,480) (2,805) Reported PAT 3,104 3,357 2,143 1,626 2, ,678 5, Adjusted EPS Margins (%) (bps) (bps) (bps) EBIDTA EBIT EBT PAT Effective Tax rate Exhibit 2: Operational data Rs mn Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 YoY (%) QoQ (%) YTD'13 YTD'14 YoY (%) Installed capacity (MW) 2,600 3,140 3,140 3,140 3, ,600 3, Units generated (MU) 5,197 5,183 5,665 4,841 4, ,416 14, Indicative PLF (%) Net generation (MU) 4,880 4,686 5,097 4,352 4, ,204 13, Units sold (MU) 4,880 4,841 5,097 3,775 4, ,848 12, Short term sales mix (%) Average realisation (Rs/unit) Short term realisation (Rs/unit) Long term ralisations (Rs/unit) Fuel cost (Rs/unit sold) Emkay Research January 30,

3 Earnings remain highly leveraged to merchant tariffs and coal prices JSWEL has an open business model on both fronts: fuel (all coal import on spot basis) and off-take (sells around 50% power on merchant). This creates a highly volatile earnings profile. Our sensitivity analysis suggests that Rs0.25/unit change in merchant tariffs from the base case changes FY14E and 15E APAT by 12% and 14%, respectively. Similarly, a 10% change in global spot coal prices from the base case could change earnings by 19%- 23%, respectively. Exhibit 3: Sensitivity of earnings FY14 FY15 Revenue APAT Revenue APAT Base case 97,252 10,558 95,471 8,903 Merchant tariffs Higher/lower by Rs0.25/unit +/-2% +/-12% +/-2% +/-14% Fuel cost Higher/lower by 10% 0% -/+19% 0% -/+23% Source: Emkay Research Revise our FY14/FY15 earnings down by 12%/11% To factor in higher fuel costs we lower our FY14 and FY15 EPS estimates by 12% and 11%, respectively. Exhibit 4: Revised estimates FY14E FY15E Rs mn. Old New % Change Old New % Change Net Sales 98,710 97, % 95,472 95, % EBITDA 34,131 32, % 30,900 29, % APAT 12,020 10, % 9,975 8, % Source: Emkay Research Exhibit 5: Effective capacity build-up MW FY12 FY13 FY14E FY15E SBU I SBU II Ratnagiri 925 1,200 1,200 1,200 Raj West I ,080 1,080 Total 2,100 2,645 3,140 3,140 Exhibit 6: PLF build-up PLF (%) FY12 FY13 FY14E FY15E SBU I 85% 101% 88% 85% SBU II 85% 101% 88% 85% Ratnagiri 84% 84% 79% 75% Raj West I 61% 74% 75% 80% Total 81% 87% 80% 79% Exhibit 7: Revenue build-up Rs mn FY12 FY13 FY14E FY15E SBU I 7,356 9,552 9,681 8,727 SBU II 16,975 22,043 22,340 20,140 Ratnagiri 23,663 32,127 27,485 26,133 Raj West I 4,872 10,602 22,551 24,541 Others 8,322 15,020 15,196 15,930 Total 61,188 89,343 97,252 95,471 Exhibit 8: PAT build-up Rs mn FY12 FY13 FY14E FY15E SBU I 906 2,556 2,575 1,864 SBU II 1,688 5,132 5,278 3,729 Ratnagiri , Raj West I ,379 3,586 Other income/others 1, Total (before minorities) 3,001 10,637 10,606 8,975 Emkay Research January 30,

4 JSW Energy: Investment summary Earnings forecast - Emkay vs. Consensus (Rs mn) Emkay Consensus Variance FY14E 10,558 10,599 NA FY15E 8,903 10,232-13% Company description JSW Energy Ltd., a power utility arm of Sajjan Jindal-led JSW group, was incorporated in Currently, it owns 3.1GW of operational power plants, with another 240MW under development. It came up with an IPO in 2009 at Rs100/share. Around 50% of the current operational capacity is on merchant. Focus Chart Recent update EGoM approves the request to raise production of the Kapurdi mine to 7mtpa till Jallipa production is ramped up. Units 5-8 declared commercial operations during Feb-Mar 13. Provisional tariff order received from RERC for Barmer Unit1-4 and Unit 5-8, the tariff provided at Rs3.63/unit and Rs3.86/unit, respectively Q13 4Q13 1Q14 2Q14 3Q14 Merchant realisation (Rs/unit) Fuel cost (Rs/unit) Promoter background Sajjan Jindal: Chairman & Managing director (52 years old), with a BE in m echanical engineering from Bangalore University. He is the second son of the late Sri O.P. Jindal, the founder of Jindal Group. He is also a former Haryana power minister. Prithvi Raj Jindal: A co-promoter (60 years old), with a BA degree. He is the eldest son of Sri O.P. Jindal. He founded Jindal Saw Ltd. in 1984, and now is at the helm of affairs of the company looking after it as Vice-Chairman. Investment rationale The earnings of JSWE are highly sensitive to coal and merchant power prices, due to the open business model on the fuel and offtake front. The sensitivity analysis shows that the earnings for FY14E and FY15E can vary by 12% and 14%, respectively, for every Rs0.25/unit change in merchant tariffs. Similarly, every 10% change in coal prices can change the earnings estimates by 19-23% over the same period. Overall management commentary continues to remain weak compared with the past few quarters indicating PLFs could remain under pressure. Hence, we believe there could be further downside risk to our FY14 and FY15 EPS, resulting from lower PLFs, increase in global coal prices and higher hedging costs, and banked energy losses. Despite the stock price correcting 20% over the past one month we maintain our Sell rating on JSWE, given the EPS downgrade risks, coupled with the commodity business model and the poor visibility on earnings for FY16 (PAT Rs5-7bn). In our view, FY14 could be the peak of earnings, and we could see a chance of Rs48-50 becoming a top for the stock. ). At the CMP of Rs44, the stock trades at 8x15EPS. Valuations Our revised target price of Rs38/sh (Rs46/sh earlier) is based on PER of 7x on our FY15E EPS (for which downgrade risks remain). Risk s (1) Higher-than-expected merchant power prices, (2) tariff approval for Barmer in excess of Rs4. Top 5 Institutional holdings Name Holding % LIC 4.9 Indus Capital Group 3.0 Vanguard Group 0.5 Dimensional Fund Advisors 0.5 IDFC MF 0.5 Shares pledge Period Promoters holding Pledge % of Prom. holding Pledge % of total holdings Dec % 27.4% 21.0% Mar % 32.8% 25.1% Jun % 49.7% 37.3% Sep % 48.4% 36.3% Dec % 49.5% 37.2% Source: BSE Emkay Research January 30,

5 Key Financials (Consolidated) Income Statement Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E Net Sales 61,188 89,343 97,252 95,471 Growth (%) Expenditure 46,711 61,411 64,820 65,765 Employee Cost 905 1, Other Exp 5,709 5,728 7,010 7,298 SG&A EBITDA 14,478 27,932 32,432 29,706 Growth (%) EBITDA margin (%) Depreciation 5,033 6,615 8,073 8,073 EBIT 9,444 21,317 24,359 21,634 EBIT margin (%) Other Income 1,466 2,134 1,377 1,059 Interest expenses 7,172 9,628 12,040 11,104 PBT 3,738 13,823 13,697 11,589 Tax 737 3,186 3,091 2,614 Effective tax rate (%) Adjusted PAT 3,001 10,637 10,606 8,975 Growth (%) Net Margin (%) (Profit)/loss from JVs/Ass/MI Adj. PAT After JVs/Ass/MI 2,995 10,549 10,558 8,903 E/O items -1,295-1, Reported PAT 1,700 9,037 10,558 8,903 PAT after MI 2,995 10,549 10,558 8,903 Growth (%) Cash Flow Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E PBT (Ex-Other income) 2,272 11,689 12,320 10,529 Depreciation 5,033 6,615 8,073 8,073 Interest Provided 7,172 9,628 12,040 11,104 Other Non-Cash items Chg in working cap -7,405 1,359-2, Tax paid ,186-3,091-2,614 Operating Cashflow 6,771 26,104 27,090 27,504 Capital expenditure -16,451-9,525-4,788-5,746 Free Cash Flow -9,681 16,579 22,302 21,758 Other income 1,466 2,134 1,377 1,059 Investments Investing Cashflow -19,277-7,234-3,411-4,686 Equity Capital Raised Loans Taken / (Repaid) 15,846-1,555-5,411-6,118 Interest Paid -7,172-9,628-12,040-11,104 Dividend paid (incl tax) 820 3,837 4,484 3,781 Income from investments Others 0-9,485-9,440-10,480 Financing Cashflow 9,059-16,831-22,407-23,922 Net chg in cash -3,446 2,040 1,272-1,104 Opening cash position 12,232 8,786 10,825 13,216 Closing cash position 8,786 10,825 12,097 12,111 Balance Sheet Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E Equity share capital 16,401 16,401 16,401 16,401 Reserves & surplus 40,600 45,637 52,358 56,777 Net worth 57,001 62,038 68,759 73,178 Minority Interest Secured Loans 128, , , ,186 Unsecured Loans Loan Funds 128, , , ,186 Net deferred tax liability 1,292 1,524 1,524 1,524 Total Liabilities 187, , , ,459 Gross Block 124, , , ,698 Less: Depreciation 14,818 21,320 29,392 37,465 Net block 109, , , ,233 Capital work in progress 42,517 15,922 15,580 21,326 Investment 2,871 2,714 2,714 2,714 Current Assets 37,856 45,896 50,772 51,477 Inventories 7,658 4,415 5,629 5,636 Sundry debtors 11,760 18,487 19,759 19,345 Cash & bank balance 8,786 10,825 13,216 14,327 Loans & advances 6,710 7,842 7,842 7,842 Other current assets 2,942 4,327 4,327 4,327 Current lia & Prov 5,925 13,052 13,286 13,291 Current liabilities 5,925 13,052 13,286 13,291 Provisions Net current assets 31,931 32,844 37,486 38,186 Misc. exp Total Assets 187, , , ,459 Key Ratios Y/E Mar FY12A FY13A FY14E FY15E Profitability (%) EBITDA Margin Net Margin ROCE ROE RoIC Per Share Data (Rs) EPS CEPS BVPS DPS Valuations (x) PER P/CEPS P/BV EV / Sales EV / EBITDA Dividend Yield (%) Gearing Ratio (x) Net Debt/ Equity Net Debt/EBIDTA Working Cap Cycle (days) Emkay Research January 30,

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