Citi :Electric Utilities: 2011 Sector Outlook

Visit http://indiaer.blogspot.com/ for complete details �� ��


Remain Underweight Despite Underperformance
 India to add 113GW in the next 7 years – Private utilities lead charge — We
expect ~113GW (+79% from end-FY10 capacity) of additions over next 7
years to reduce 13.3% peak deficit at end-FY10. Private utilities will lead
charge over government utilities with faster decision making contributing ~
57% of the Rs5.1tn of investments in generation over FY10-15E.


 Key risk to sector performance – stock supply, capital and regulatory — With
numerous power QIPs/IPOs over the next two 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/ regulatory.
 Merchant prices expected to decline — Despite delay in capacity additions,
India has added ~11GW capacity YTD in CY10. Due to capacity addition
energy deficit has remained range bound despite healthy GDP/industrial
growth. Moreover deficit has fallen to 5.4% in Sep’10 (v/s 9.9% in Sep’09)
due to strong monsoons. As a result merchant prices have declined 10%-
30% YoY over same period.
 Mounting SEB losses could pose further threat to merchant prices — SEB
losses increased from Rs46bn in FY93 to Rs319bn in FY08 and to Rs400bn
in FY10. At FY08 tariff levels, the 13th Finance Commission believes this
could be as high as Rs686bn in FY11E and move up to Rs1161bn by FY15E.
Mounting SEB losses could further lead to cap on merchant prices and pose
a key risk to sector.
 Modest performance over last year — 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.

 Continue to be underweight utilities relative to MSCI — As 1) private utilities
face the risk of falling merchant prices and rising coal prices and 2)
regulated government utilities face the risk of rising competition from private
utilities. Our top picks in the space in the order of preference are: 1) PGCIL
2) Tata Power 3) NTPC and 4) Lanco Infratech