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Know your Power
'Flight to safety' moving stocks this month; fuel issues
the likely theme in the month ahead
• Shift to safety – NTPC outperformed the sector by a neat margin
this month. The recent loan scam has led to fears of risk aversion
amongst banks and potential impact on project lending, in turn
contributing towards underperformance of JSWE, Adani and RPWR.
NTPC’s move to lock in its capacities at long-term PPAs, guaranteeing
15.5% RoE, insulates it from pricing, cost of debt and fuel costing
vagaries, important areas of recent investor concern.
• Sharp dip in bilateral contracts as % of short-term transactions
(41% in Oct-10, vs 48.5% month ago), and a shift to power exchange
and UI. This suggests a) state utility-buyers’ abstinence from pricey
power and / or b) IPP-sellers’ disinclination towards bilaterals, as 3-
month contracts prices were in backwardation around Jul-Aug ’10. In
hindsight, state utilities made the right decision, as UI / exchange prices
remained lower than bilaterals.
• Capacity additions scored a duck (almost) yet power deficit
continued to decline, to 8.7% in Nov-10 (12.2% in Nov-09). This was
due to low level of demand growth (0.74% in Nov). For a country that is
growing at 8.5%, weak power demand growth (4.95% fytd) seems
counter-intuitive and suggests that demand is constrained by lack of
supply.
• Fuel cost and security likely to be key theme next month: Our
colleagues are upping their global coal price forecasts, while data points
on potential domestic coal price increase and supply shortages are
pouring in too. IPPs are running for fuel security – two coal-buy deals
announced by Lanco and JSWE this month – deal metrics and
consummation will be likely stock catalysts. On this theme, TPWR
(Neutral) is a net beneficiary of rising coal prices, given its stake in Indo.
Coal mines. We see NTPC continuing to claw back, with potential safety
and assured returns as USPs. Lanco and Adani, two strong execution
plays, are our top picks from a one-year perspective. RPWR rmains UW.
Bilateral contract volumes down sharply
Short-term transactions as % of total power generated fell to 8.85% in Oct-10,
compared to 10.7% in Sep-10 and a peak level of 12.9% (Figure 1). Within shortterm
transactions, share of bilateral contracts fell sharply to 41%, compared to 48.5%
in Oct-10 and peak level of 58%. On the other hand, share of Unscheduled
Interchange (UI) rose to 39.6% (33.4% month ago) and that of power exchange rose
to 19.2% (18.1% month ago).
In our view, there are two plausible explanations to this: a) state utilities are
refraining from the market, choosing not to buy expensive power and / or b) IPPs did
not want to enter into 3-month bilateral contracts around July-August (which in turn
is showing in Nov volumes) as forward contract rates were lower. In hindsight, state
utilities made the right decision not to enter into bilateral transactions, as UI /
exchange prices have remained lower than bilaterals over last few months
Power deficit continues to trend down; weak demand
growth continues
Nov-10 energy deficit of 6.5% is down 140bps YoY, while average energy deficit
over the last 6 months (7.5%) is down 200bps YoY. The decline is steeper in case of
peak deficit. Nov-10 peak deficit of 8.7% is down 350bps, while average peak deficit
over the last 6 months (10.46%) is down 224bps.
Power demand growth has been weak over the past few months. Average monthly
energy demand growth over the past 4 months was just 0.8%, compared to 11.5% in
the corresponding period last year. Similarly, peak demand growth over last 4
months has averaged 2.4% vs. 5.7% last year.
Barely any new capacities added in November; YTD
capacity addition just 33% of FY11 CEA target
Monthly capacity addition in Nov, at 39MW (excl. renewables), was well short of
official target of 845MW addition. All projects targeted for Nov-11 CoD slipped.
This includes Barmer Unit-5 (135MW) of JSW Energy. Only two units of Barmer
have been commissioned so far and the project is delayed by at least 6 months, in our
view. However, the potential slippage had already been factored into market / analyst
estimates many months back, but probably was not factored in earlier by the CEA in
its monthly target.
CEA maintains its FY11 cap-add target of 21.4GW, vs. YTD actual of 7.67GW.
While this data points towards potential slippage (which is already factored into
stock prices in our view), it is indeed imminent that lot of capacities would get
bunched up over the next 3 years.
During 11th 5YP thru Nov-10, 24GW has been added vs. Govt’s revised target of
62GW. With 1.5 years pending for the completion of the 11th Plan, the implied
target of ~38GW for the remnant plan period seems difficult in our view.
Key projects likely for FY11 completion:
• NTPC’s Farakka, Sipat, Simhadri (total 3.2GW).
• Lanco’s Udupi’s 2nd Unit (600MW).
• Adani’s 4th 330MW unit at Mundra.
• The balance units at JSW’s Ratnagiri (3X300MW) and Barmer (6X135MW).
Correlating recent newsflows to stock performance
The IPP space continued to underperform the markets. NTPC outperformed the
sector by a handsome margin this month. The recent loan scam has led to fears of
risk aversion amongst banks and potential impact on project lending, in turn
contributing towards sharp underperformance of JSWE, Adani and RPWR. NTPC’s
move to lock in its capacities at long-term PPAs, guaranteeing 15.5% RoE, insulates
it from pricing, cost of debt and fuel costing vagaries, important areas of recent
investor concern. See our recent research on this topic.
Valuation and stock picks
Adani Power (OW) and Lanco Infratech (OW) remain our top picks in the Indian
power space, from a one-year perspective. We like Adani for its execution abilities
and Lanco for its near-term capacity ramp up, diversified fuel mix and less exposure
to coal price volatility.
Fuel cost and security likely to be key theme next month: Our colleagues are upping
their global coal price forecasts, while data points on potential domestic coal price
increase and supply shortages are pouring in too. IPPs are running for fuel security –
two coal buy deals announced by Lanco (Griffin at Australia) and JSWE (CIC
Energy at Botswana) this month. Deal metrics (Eg: how much is Lanco paying for
this purchase) and consummation will be likely stock catalysts. On this theme,
TPWR (Neutral) is a net beneficiary of rising coal prices, given its stake in Indo.
Coal mines. We see NTPC continuing to claw back, with potential safety and
assured returns as USPs. We maintain UW on RPWR, as the stock seems to be
pricing in decent medium-term execution already. Greater visibility on the Chitrangi
project (4GW) provides a key upside risk to valuations, in our view.
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