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Power & utilities
Action
Given a likely 60% (>100GW) rise in capacity by FY15F, we like IPPs with a frontended
capacity pipeline, credible execution ability, adequate fuel security (sourcing,
pricing) and a healthy offtake mix. Lanco is our top IPP pick (it scores highest in
‘our milestone risk matrix’), along with NTPC (reasonable risk-reward). PWGR, a
hedged play on capacity growth, offers 30%-plus potential upside on our estimates.
Catalysts
Strong latent demand growth, regulatory developments (eg, auctioning of coal
blocks, dilution in ‘no-go’ mining areas) and reduction of T&D losses.
Anchor themes
As the electricity demand-supply gap narrows, merchant tariffs trend lower and the
domestic fuel shortage intensifies, developers able to minimise fuel security risks
(sourcing, pricing) should be long-term winners. A 150GW+ pipeline by FY17F
offers growth visibility in transmission. Health of SEBs remains a key concern.
The power of execution
Sector offers strong growth opportunities
India’s power sector offers a compelling macro perspective for attracting private
sector investments – an electricity-deficit scenario where demand is ‘restricted’
by available supply, and a progressive regulatory regime which now allows
varied business models that we estimate could yield equity IRRs of 15-60%.
‘Restricted’ demand-supply to reach parity by FY15F
We expect India’s power generation capacity to rise by 60% from 167GW as of
October 2010 to 272GW by FY15F, with demand likely to grow in tandem with
real GDP growth of around 8% pa. Latent demand may well be the surprise
factor.
Fuel security is the key differentiator; captive coal will rule
We believe a combination of the cost of generation and offtake mix (cost-plus,
bid tariffs, spot) will determine long-term profitability for the IPPs in India. The
yawning coal deficit is a major concern, in our view.
Spot/short-term tariff realisations to fall 30% by FY15F
In tandem with high growth in ‘untied’ capacity and a stronger, extensive interregional
transmission system, we expect net merchant tariffs to drop to
Rs3.5/kWh by FY15F, or to a level that allows a reasonable profit spread to yield
20-30% ROE.
PWGR and Lanco our top BUYs, RPWR our lone REDUCE
PWGR is a hedged play on India’s 156GW generation capacity addition pipeline;
we expect an FY11-17F EPS CAGR of 16%. A catch-up in the capitalisation rate
and removal of equity overhang are potential catalysts. Lanco scores highest
among India IPPs in our ‘milestone risk matrix’; our forecast of a normalised
50%-plus EPS CAGR for FY10-13F and normalised multiples look inexpensive.
NTPC offers a favourable risk-reward at current levels; we believe the lower
earnings trajectory is priced in. RPWR’s plans keep getting bigger, but it remains
a waiting game. JSW Energy scores low on fuel security and its capacity
additions are back-ended. Adani Power offers a compelling growth story, but this
looks reasonably priced in, in our view.
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