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POWER
Present tense, but future perfect: Q3FY11 Result Preview: Edelweiss
Key highlights of the sector during the quarter
• Capacity addition has been lack luster which will result in muted earnings
growth across players.
• EPC revenues / margins are expected to be better as project completion /
milestone payments will be concluded in Q3FY11 for Lanco and Reliance
Infra.
• Merchant prices remained subdued due to abnormal winter and cautious
stance adopted by SEBs.
• Traffic growth has been robust with a stable macroeconomic environment.
Result expectations for the sector and stocks under coverage
• Regulated power entities are expected to report flat / marginal sequential
earnings growth.
• Overall earnings for the quarter are likely to be subdued on the back of low
merchant prices and limited capacity addition.
• Earnings from core operations are likely to improve for GMR, GVK, Adani
Enterprises, Mundra Port and Lanco backed by higher volume growth.
Outlook over the next 12 months
• We expect merchant trades to be under pressure even in Q4FY11 due to the
winter season and onset of summer not before late March resulting in
average annual merchant tariff of ~ INR 4.5–5 /kwh for FY11.
• Capacity addition is also expected to rise in upcoming quarters, especially in
case of NTPC, Lanco, Tata Power, Adani Power and Nav Bharat Ventures.
These will augur well for earnings growth.
• Due to the buoyant macroeconomic environment, traffic growth (air+port) is
expected to be strong which will augur well for Mundra Port, GMR, GVK and
MARG.
• We expect the airport regulator to announce tariffs in Q4FY10/Q1FY11 which
would aid earnings going forward.
• Project execution is expected to pick up for Reliance Infrastructure and MARG
which will aid valuations.
Recommendations
Top picks: Tata Power, PTC, Navabharat Ventures.
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