Stock pick of the week: Why JSW Energy is a contrarian bet

Though the broader market is scaling new peaks, JSW Energy is still languishing on the sidelines. Several factors have contributed to this underperformance. First, the jump in international coal prices, has hurt the margins of most thermal power generators. Second, JSW Energy is yet to enter into long-term power purchase agreements (PPA) for its Vijayanagar plant and this uncertainty is hurting investor sentiments. Third, weak demand for merchant power— traded on stock exchanges and sold on a short-term basis—and the resultant low spot rates. Due to low power rates in Karnataka and Maharashtra— average realisation was down by 7% in 2016-17—JSW Energy reduced operation of Vijayanagar and Ratnagiri plants. Plant load factor (PLF) of the Vijayanagar plant fell from 89% to 59% and for Ratnagiri plant it fell from 80% to 64%. Revenue and net profit of the company fell by 16% and 57% respectively during 2016-17. Though there is a slight improvement, conditions may remain weak in the first quarter of 2017-18 as well. Its first quarter revenue and net profit are expected to fall 7% and 30% year-on-year, respectively.

Despite such a performance, analysts are getting bullish on this counter for several reasons. First, the underperformance has brought down its valuation to the lowest level in the last five years. Second, analysts are hopeful that a new long-term PPA will be signed with Karnataka soon and this will help JSW Energy reduce its not so lucrative merchant power exposure from 29% to 10%. Margin pressure may also ease in the coming years because global coal prices are expected to soften due to the fall in thermal power capacity addition by China—it constitutes 48% of global coal consumption.

JSW Energy also plans to utilise the current stress situation in the power sector to step up its inorganic activity to achieve its target of 10,000 MW from the current 4,100 MW—3,100 MW of thermal and 1,400 MW of hydro power. While the acquisition of the 500 MW Bina plant in Madhya Pradesh from Jaiprakash Power Ventures has been postponed to 31 December 2017 from the earlier deadline of 31 May 2017, the acquisition of the 1000 MW Tamnar plant in Chhattisgarh from Jindal Steel & Power is on track and the process is expected to be completed before the deadline of 30 June 2018.


Though the current situation is bad for the company, it is expected to improve in the coming years, so it is a value buying opportunity for the high risk–high return investors.
Selection Methodology: We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts. You can see similar consensus analyst rating changes during the past week in the ETW 50 table.