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Cheaper coal, rising rupee help fire up JSW Energy

The worst appears to be over for JSW group's power company — JSW Energy. International coal prices have come down, the rupee has gained and merchant rates have remained stable. These could well boost the profitability of the company going forward.


The 3,140 MW power company uses international coal to fire two-third of its total capacity. Since the start of the year, Indonesian and South African coal prices have fallen by 12% and 15% respectively in dollar terms due to lower global demand, especially from China. In rupee terms, the correction is sharper as the currency has strengthened 4% in the year-to-date. It is a huge positive as fuel cost is close to  85% of the company's total expenditure or more than half of the company's total revenues.

On the sales front, around half of the company's power produced is sold in the open merchant market, while the remaining is on long-term agreements. Merchant tariffs have remained stable between 4.5-5 in the southern markets.

"Macro factors are becoming favourable for us and if the economy picks up, there could be a huge demand for power again as we saw in 2007-2008." said Sanjay Sagar, joint MD and CEO of JSW Energy. "We don't think that there will be any pressure on the tariffs going forward and if the economy picks up, the merchant tariffs can also go up to five year ago levels." says Sagar. " It did not pinch people. This is a sign that going forward, rate increases won't be difficult" he adds.

JSW EnergyBSE -1.46 % also has a strong balance sheet with debt to equity of 1.7 compared to an average ratio of 4 for the industry has allowed the company to consider acquiring power assets. It is in talks with two or three companies, but is yet to finalise a deal. Despite a weak macro-economic scenario, the firm's operating profit (Ebidta) grew by 20% y-o-y in the first nine months of FY14. However, its profit after tax was higher by only 6% on higher interest. In the first nine months,  its sales were 6,533 crore, Ebidta was 2,190 crore and profit after tax was (PAT) 601 crore.


The company's stock has gained 20% in the last one month, given the improved outlook for the company, while the BSE Power Index has gained only 10%. A strong balance sheet, consistent dividend payments and a less riskier business model makes JSW Energy a preferred stock among investors.

Source: The Edonomic Times