Citi: Private Utilities - Marching Ahead of Government Utilities

India Electric Utilities
Private Utilities - Marching Ahead of Government Utilities
 India to add 113GW in the next 7 years; private utilities will lead the charge —
We expect ~113GW (+79% from end-FY10 capacity) of additions over the next
7 years to reduce the 13.3% peak deficit at end-FY10. Private utilities will lead
the charge over government utilities with their faster decision process
contributing ~ 57% of the Rs5.1tn of investments in generation over FY10-15E.
 Modest performance over last year – next 4 years the sweet spot — Our India
strategist has been underweight the sector relative to MSCI over last year and
interestingly, 5/8 stocks in the CIRA India Electric universe (10/15 stocks
analyzed) have underperformed the BSE Sensex over last year. However, the
next 4 years would be the sweet spot with: (1) capacities commissioned, (2)
companies generating huge cash flows maximizing the merchant opportunity
and (3) strong earnings momentum (sector growing PAT at a CAGR of ~40%+).
 Key risk to sector performance – stock supply, capital and regulatory — With
numerous power QIPs/IPOs over the next 2 years. As the ability of frontline
companies/groups to get capital/land/clearances/fuel is far superior to marginal
players, we expect the trend of consolidation to continue with smaller players
selling out coal linkages/land procured for planned power plants to larger
players. Others risks include capital access and regulatory intervention.
 Our primary valuation tool – DCF — With P/E and P/BV being used for checks
and balances. We believe EV/MW cannot be a primary valuation tool (as no two
power plants are similar) but could be used for comparisons.
 Top picks in India Electric Utilities — In the order of preference are (1) Lanco
Infratech, (2) Tata Power and (3) Adani Power. CESC is a value pick, which
should perform once retailing losses come down. We rate JSWEL, JPVL and
PGCIL as Hold (2L) and NTPC as Buy (1L).
 Initiate coverage on JPVL & JSWEL at Hold (2L), despite robust growth — JPVL
will need ~US$500mn of equity over the next 18 months & has back-ended
additions. JSWEL has limited upside & high merchant sales/imported coal.