Indian Utilities - Jetlag; Global Investor Feedback: Macquarie

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Indian Utilities - Jetlag
Global Investor Feedback
Event
􀂃 Over the past month, we met with investors in Asia, Europe and the US,
talking Indian utilities. Most investors appear to be underweight the sector with
concerns around fuel supply risk and the increasing losses from State
Electricity Boards (higher counterparty risk). We see upside in a few names
which appear better positioned to benefit from the strong power thematic.


􀂃 In the power generation space, we prefer those with strong volume growth (as
opposed to pricing growth) and some competitive fuel advantage (hard to find
in India, due to the inability to acquire domestic upstream assets). We
highlighted Adani Power, Jindal Steel and Power and Power Grid (FPO
participation at Rs.90/share or less) as key picks. We remain cautious on
those not bringing on a significant proportion of projected capacity in the next
24 months (Reliance Power) or those highly leveraged to strong merchant
power prices and limited fuel security regarding supply or price (JSW Energy).
Impact
􀂃 Managing fuel risk – who is better positioned: After the global road show
of Coal India, most investors were conscious of the widening demand-supply
gap for coal in India, driven by the power sector. We already see evidence
today of power projects having coal linkages with Coal India going to eauction
to acquire some of its fuel requirements, such as Lanco’s 600MW
Amarkantak. We see this as a risk for those solely relying on coal linkages.
This includes NTPC, the biggest customer of Coal India, which achieves
material ROE outperformance due to operating with PLF’s above its 85%
regulated availability norm.
􀂃 Adani Power has the benefit of its parent – the country’s largest coal trader, a
coal producer, greenfield asset owner and contract miner – while Jindal Steel
and Power has a 250MT captive coal mine in production today (6mtpa). Tata
Power is the only utility with a net-long thermal coal position (17–19mtpa to
FY17) and hence is positively leveraged to thermal coal prices (Macquarie are
bullish on thermal coal prices in the short to medium term).
􀂃 SEB loss concerns – volume growth over price: No doubt, the
government’s 13th Finance Commission Report highlighted the issue,
projecting state transmission + distribution power losses at US$26bn by FY15
(relatively, this is higher than the forecast of total subsidies paid by the Central
Government in petrol, food, fertiliser, etc). In our view, this weighs heavily on
the SEB’s appetite to acquire more expensive power as more merchant
volume is fed into the power market. Macquarie Research and power traders
we spoke too think this will continue to put pressure on merchant power prices
– look for greater volume exposure than purely pricing exposure.
Outlook
􀂃 We highlighted Adani Power (ADANI IN, Rs141, OP, Rs144), Jindal Steel
(JSP IN, Rs717, OP, Rs962) and Power and Power Grid (FPO participation at
Rs.90/share or less) as key picks.