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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.
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).
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