Power Demand and Coal Prices pose Challenge

JSW ENERGY Power Demand, Coal Prices Pose Challenges JWALIT VYAS & PARUL BHATNAGAR 

ET INTELLIGENCE GROUP 

JSW Energy’s stock has declined by over 20% in the past three months, reflecting its operating woes. The company’s performance has been sluggish over the past three quarters on account of rising input costs, plant shutdowns and lower traction in power purchase agreements. Considering the uncertainty in power demand and high imported coal prices, an immediate recovery in the company’s operations looks difficult.

High dependence on the spot market for coal and high exposure on merchant tariff will make things difficult for JSW Energy. The company buys almost 70% of the coal from the spot market, which means it suffers from a higher exposure to the fluctuation in coal prices. Coal prices have more or less remained firm since last year, which makes power generation expensive.

It becomes a difficult task to sell power at prices that can compensate for higher production, cost given the financial problems of the state electricity boards, which are major customers. JSW Energy sells nearly two- thirds of the power produced in the short-term market. These factors have impacted the company’s financial performance. Despite a double-digit year-on-year growth in revenue, its earnings before depreciation, interest, and taxes (EBDIT) has fallen in two out of the three quarters ended June 2011.

During the June quarter, its sales rose by 23.5% to . 1,145 crore, while EBDIT fell by 14% to. 415.2 crore. The company witnessed plant shutdowns which resulted in lower efficiency. A delay in tariff approval led to the Barmer plant shutdown.

This has forced the company to operate on lower capacity utilisation. This was evident in its Vijay Nagar plant which operated at a capacity utilisation of 80%. Historically, it has operated at more than 90% capacity utilisation.

Given this, the management has slowed down deployment of capital for its future projects drastically. As on March 31, the company has deployed only 1% of the total project cost of around. 40,000 crore.

The company plans to generate 12070 MW of power by the end of FY16 from the current capacity of over 3,000 MW. Its current debt-equity ratio is 1.7, which is lower when compared with 2.7 for Adani Power. Though its investments ensure long-term growth, the company’s performance would be under pressure in the medium term.

Source: ET