Edelweiss Research - December, 27 2010- Power

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n  Emerging scenario

·         Coal India (CIL), is expected to fall short in its supply commitments in the near future. Already FSAs for new capacities are being signed at guarantees of 50-60% of contracted quantity (versus 80-90% earlier). Thus, fuel shortage is imminent. It is expected that either PLFs of new plants will be sub-optimal or there will be 20-30% blending of imported coal, raising fuel costs and thus power costs. The average power procurement cost for most SEBs is ~INR 3/kWh today; this is expected at ~INR 4/kWh in the coming 2-3 years.

·         Most SEBs we met were confident that capacity additions (even assuming one year delays) will largely reduce energy deficit (in some cases, be surplus) by FY14-15.

·         Almost all SEBs we met, expect the cost of merchant power in FY11E to be ~INR 4.7-4.8/kWh. While, the demand-supply gap is expected to reduce by FY14-15, but cost push (due to higher imported coal content) will raise base PPA prices. The long-term PPA-based prices (including competitive bids) for the states we met range between INR 3.8/kWh and 4.3/kWh for FY14. We estimate, on a cost plus basis, a 100% imported coal-based plant will have levelised tariffs of INR 3.65 at landed cost of USD 75/ton and RoE of 16%, and that of a plant with 30% imported coal blending will be INR 2.89/kWh(refer tables 6 & 7). Hence, SEBs expect merchant rates to stabilise at INR 3.8-4.0/kWh over the next 2-3 years, with a premium or discount, depending on peak shortages and seasonal/climatic patterns.

·         Currently, SEBs are under financial stress, with some states resorting to fresh loans to fund entire losses. The losses are not only due to high AT&C losses (~30% pan India), but also owing to the widening gap between revenue and costs. From only ~INR 0.35/kWh in FY07 and FY08, the gap has widened to INR 0.6/kWh in FY09, and is expected to have grown further in FY10 and FY11, as merchant purchases and costs catapulted while tariffs have not been hiked.

n  Our view

Going forward, with lower supply deficit and weakening SEB financials, power may become a buyer’s market. Thus, we lower our merchant price assumption by INR 0.5/kWh to INR 4.5/kWh for FY11 and to INR 4/kWh for FY12 onwards. We believe most developers will adopt a blended approach for power offtake, opting for 70-80% PPA and the balance on merchant, to earn minimum blended PAT of ~INR 0.50/kWh. The impact is highest on Navabharat Ventures wherein we have reduced SOTP by INR 44/share to INR 467 SOTP (post roll over to FY13 at INR 518/share, refer details on Table 13 on Pg 8). For all other stocks under coverage, the impact could be minimal since their merchant exposure is mainly from FY13 (we have already assumed merchant rates of INR 4/kWh for the period).