India Power Sector --Merchant-power plays: far from over :: Daiwa

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Merchant-power plays: far from over
Summary
􀂃 We maintain our Positive rating for the India Power Sector. We expect the demand-supply gap for
power in India to remain above 7% until FY15, based mainly on our electricity-demand CAGR
forecast of 9% for FY11-15, and despite our forecast of effective capacity additions of 88GW over
the FY11-15 period. As such, we believe companies with operational capacity with exposure to the
merchant/short-term power markets should continue to record strong earnings growth over the
next 12 months.
􀂃 We expect the demand-supply gap for thermal coal to rise to 136m tonnes in FY15, from 6m
tonnes in FY10, based on our forecasts for power-capacity additions. Hence, we prefer companies
that can deal effectively with our scenario of an emerging shortage of coal supplies from Coal India
(CIL) through imports of coal.
􀂃 Top picks – Adani Power (Adani) and JSW Energy (JSWE). We believe the players with
operational power capacities and high leverage to the short-term power markets offer greater
upside potential than players with back-ended capacity additions. We initiate on Adani with a 1
(Buy) rating and JSWE with a 2 (Outperform) rating, as we believe they will benefit the most
from exposure to higher short-term tariffs. We initiate coverage of Reliance Power (RPWR)
with a 5 (Sell) rating, as we expect the company to have no incremental capacity until FY12.
We have downgraded our rating for NTPC to 3 (Hold) and maintain our 3 (Hold) rating for the
diversified player Reliance Infrastructure (RELI), as we think their shares offer less upside
potential than the other stocks we cover.