JSW Energy: Recommendation Review

We had recommended JSW Energy in DSIJ Vol. 27, Issue No. 16 (dated July 29, 2012). At that time, many would have raised a brow on seeing a power sector stock as our recommendation. However, things have improved for the better in the sector. The main driver has been the government’s debt restructuring scheme for the power distribution companies, which has improved the sentiment. Our pick, JSW Energy, has also performed well. The stock touched Rs 60 on 25th September, 2012, yielding returns of about nine per cent.

The main rationale behind recommending this scrip was its exposure to merchant power companies. These companies may look vulnerable during times of abundant power, but in our country, where power generation is not in sync with demand, companies like JSW Energy stand to benefit. While other power generation companies are facing issues on the fuel front, this company has fairly good fuel security, with projects based on lignite and imported blended coal from South Africa and Indonesia. This fuel linkage insulates it from the fuel uncertainty that is faced by most of its Indian peers.

During times of weak monsoons, the domestic hydro power plants will generate lower energy, and hence, merchant rates will also rise, benefiting JSW Energy. Also, after the government’s recent decision, we expect better financial health of state electricity boards. This will lead to an increase in merchant power demand, with better realisations.

With nine per cent returns in just two months, the scrip looks good and one can book profits at this level. Investors with a high risk appetite can wait till the price touches Rs 63, which will yield them about 15 per cent returns.