CLSA on India Power Sector: Storing up

India Power Sector: Storing up
We prefer companies with higher degree of fuel security.

Over the past 10 days we met with officials of the Ministry of Power and Coal,
principal adviser of the Planning Commission, Central Electricity Regulatory
Commission and 11 power firms. While all are encouraged by the increase in
private investment, fuel availability remains the biggest concern. Coal imports
are likely to rise over the next couple of years and will test ports and railway
infrastructure. Most expect the short-term tariffs to correct from current levels.
We like Jindal Steel & Power, Tata Power, NTPC and Adani Power.
Cost-plus regime is on the way out. The cost-plus regime for the
public-sector companies is most likely ending in January 2011 with CERC
also recommending the same. NTPC (NATP IS - Rs217.9 - O-PF) is thus
planning to sign power-purchase agreements (PPAs) for about 25GW by
December 2010 - before this regime ends. The cost-plus mechanism
however is likely to continue for very large and complex hydropower
projects
Domestic coal production not adequate. Domestic coal production is
likely to disappoint given the constraints faced by the coal-mining
companies in acquiring land and getting environmental clearance. The
production from captive mines allocated to the public and private sector is
expected to increase (the performance so far has been dismal) going
forward however it wont be enough and we expect the total requirement
of imports to exceed 100 million tonnes by FY13.
Merchant tariffs - sliding downwards. Merchant tariffs have been
declining MoM since April and with a strong monsoon this year it is likely
that the tariffs will remain between Rs4-5/kWh for the year as a whole.
The burgeoning losses of state-distribution utilities also imply that their
capacity to buy expensive merchant power is also limited especially when
there are no major elections.
We like JSPL, Tata Power, NTPC and Adani Power. Our preference in
the power-utility space lies with companies that have a higher degree of
fuel security together with decent growth in capacity and not very high
dependence on merchant power. On this theme, we like JSPL (JSP IB -
Rs731.5 - O-PF), Tata Power (TPWR IB - Rs1389.9 - BUY), NTPC and Adani
Power (ADANI IB - Rs134.3 - O-PF) and maintain our negative
recommendation on NHPC (NHPC IB - Rs32.1 - U-PF) and JSW Energy
(JSW IB - Rs119.0 - SELL).