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Power (Sluggish Capacity addition, premium valuations)
Neutral
The power sector in CY10 was marred by sluggish capacity addition. We
expect capacity to gather steam in CY11 especially from private players. We
estimate ~ 14000 MW of capacity addition in CY11/FY12. India is likely to
miss even the revised capacity addition of 62000 MW in the Eleventh Five
Year Plan. We estimate the same will be at ~48000 MW for the Eleventh
Plan. Going ahead, companies with robust execution capability, financial
closure in place and secured fuel linkages will outperform the sector. We
are positive on companies that have an integrated business model over
regulated and merchant plays.
⇒ Rate of growth in capacity addition is likely to miss targets. However,
this will be highly crucial for regulated entities, especially NTPC, as it
has underperformed in terms of capacity addition in the past. We
expect big private players like NTPC to add 2000 MW and 3500 MW
capacity in FY11E and FY12E, respectively, which will be lower than
the earlier targets. Overall, we estimate ~14000 MW of capacity
addition in FY12. Out of these, about 50-60% will come from private
sector players
⇒ Increase in coal prices (Mccloskey Coal Index at 115, up 40% YoY)
will pose significant headwind for power utilities. This will mainly
impact private sector players who rely on imported coal. The impact
of the same on regulated central/state utilities will be minimal. Under
our coverage universe, Lanco Infra would be exposed to high coal
prices but the damage will be relatively less than players like JSW
Power and Adani Power. Though coal price rise will be a pass
through for companies under the regulated model, the availability of
coal will be a critical issue to watch out.
⇒ Merchant rates are expected to remain at | 3.8 – 4.5/kwhr in FY12E
However, elections in some states may drive prices higher, albeit for
a short period
⇒ Valuations for regulated entities (NTPC trading at 2x FY12E BV) and
merchant plays appear fairly priced at this point in time. Therefore,
we prefer integrated companies (Lanco Infra- high RoEs of 22% and
P/E multiple of 17x FY12E EPS) – i.e. the ones with robust capacity
addition plans, fuel linkages, stable power trading, distribution and
transmission business
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