Power Utilities – Positive: Daiwa

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Sector thesis: power demand-supply gap may exceed 7% until FY15
Our investment thesis for the India Power Sector is that the demand-supply gap for
power will remain above 7% until FY15, despite effective capacity additions of
88GW over the FY11-15 period.


We expect this to be driven mainly by a 9% CAGR in demand for electricity over
the period. Obtaining coal supplies is likely to be a challenge for 55GW of
capacities based on supplies (coal linkages) from CIL, as we forecast a coal-supply
shortage of 136m tonnes for FY15.
Based on our thesis, we believe the companies with operational capacity and
leverage to the short-term power markets will continue to gain from robust
short-term power rates over the next two years. We also prefer those companies
that are not solely dependent on coal linkages from CIL, and have acquired mines.
Structural outlook: three-year view
We expect effective capacity additions of 88GW over the FY11-15 period
Depending on the achievement of project milestones, we forecast the effective
capacity to be added over the FY11-15 period to be 88GW. Of this, we believe
about 54% will come from the private sector and 90% will be coal-based.
Operational capacity should benefit the most
Based on our demand and supply forecasts for the India Power Sector, we believe
companies with operational capacity will continue to gain from the demand-supply
gap of more than 7%.
Fuel security ... may be an issue in the future
We also see fuel security as an emerging threat to coal-based projects, more so for
projects planned with domestic linkages. By FY15, we forecast the demand-supply
gap for thermal coal to have increased to 136m tonnes from the current 10m tonnes.
Hence, players with limited dependence on CIL linkages and alternative fuel
sources will be the least affected.



Best-positioned: Adani Power
Adani is best-positioned on our structural scorecard, as we believe the company
will benefit from strong capacity additions of 8.3GW until FY14. Over the short
term, to FY12, we see upside potential for the share price from pre-powerpurchase-
agreement (PPA) sales, as capacities are likely to be commissioned
earlier than we expected and about six-to-nine months prior to the PPA
commencement dates. We are also confident that Adani is better-placed than its
competitors over the long term, due to its ability to weather fuel shortages.

Worst-positioned: Reliance Power
Reliance Power has a large capacity-addition plan, which involves setting up
more than 30GW. The capacity additions for most of its projects are at an early
stage and so the execution risks are considerable. There is no clarity on the
availability of gas for more than 8GW of projects in the company’s pipeline
(25% of its project pipeline).