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Power rates rise to historic high- Prefer integrated coal players
India's spot power rate rose to historic high of INR 14-15/Kwh unit - 6x regulated
tariff, just at the beginning of the busy season. What worries us is that Indian
power system has become constrained at a thermal utilisation level of c74% (a
good 500 bps lower than previous peak level of 79%), suggesting that power
plants are constrained by fuel and grid availability. We estimate that this surge
would primarily benefit Adani Power and to an extent Lanco Infratech, Shree
Cement etc.
Lack of fuel and grid availability drives merchant rates to historic high levels
The recent 15-20% fall in natural gas supplies from KG-D6, high cost for imported
fuel resulting in the stoppage of captive power plants in Karnataka and Gujarat and
grid disturbances of 1,500MW HVDC kolar line at the start of the busy season saw
merchant rates rising to historical high levels. We agree that there is marginal pickup
in demand from pre-election spending in a few states and the impact of a cold
winter reflects the power generation growth of c.9% in January (vs. YTD April to
December growth of 5%). However, we note that India has added capacity at a
12% CAGR over the last two years vs. CAGR generation of 7%.
January data is an indicator of a sharp fall in utilization rates in India
As stated in our recent note, Caught between price and permits, we estimate that
Indian coal availability could rise at a c.6% CAGR in FY10-15E, insufficient to meet
the power capacity growth of c.10%, and operating rates (PLF) could compress by
2000bps over FY11-14E, assuming other sources of capacity do not suffer from
lack of fuel. Importantly, gas availability in Jan. fell by 15-18% for one key source
(KG-D6 basin). Hence, even at 74% utilization in Jan. 2011 (500bps below the
previous peak), Indian power plants are constrained in supplying scheduled power.
Rising fears of regulatory risk and demand destruction
The current constraints in this system could lead the regulator to revisit the entire
approach toward regulating merchant rates. Merchant rates as measured by both
the UI rates and the exchange rate for power sales fell to INR2.5/unit after the
Indian power regulator imposed a penalty of INR22/unit on any buyer who
purchases power in unscheduled markets and causes grid distribution. With UI
rates now being INR15/unit, the loss-making distribution companies could face a
severe cash crunch. This raises the risk of some cap on merchant rates. Looking at
historical cap rates of INR6-8/unit, we believe our expectation of INR4/unit is
reasonable vs. the Street’s expectation of a sharp decline.
Adani Power remains our top pick
Our preferred pick continues to be Adani Power, which has captive coal coupled
with c.50% capacity leveraged to merchant rates. Lanco Infratech has high
operating leverage from rising merchant prices, and is post-correction our top midcap
pick. Another company under our coverage that could benefit is Shree Cement
(Hold). For entities selling power through long-term arrangements, a lack of fuel
implies low availability and, a low return. Our valuation methodology for the sector
is based on an average of exit P/E and NPV at CoE 12.5%. A fall/rise in merchant
rates due to seasonal factors is the key risk. For our top picks Adani and Lanco, an
INR1kWh/unit fall in merchant rates results in earnings falling by 42% and 24%,
respectively.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Power rates rise to historic high- Prefer integrated coal players
India's spot power rate rose to historic high of INR 14-15/Kwh unit - 6x regulated
tariff, just at the beginning of the busy season. What worries us is that Indian
power system has become constrained at a thermal utilisation level of c74% (a
good 500 bps lower than previous peak level of 79%), suggesting that power
plants are constrained by fuel and grid availability. We estimate that this surge
would primarily benefit Adani Power and to an extent Lanco Infratech, Shree
Cement etc.
Lack of fuel and grid availability drives merchant rates to historic high levels
The recent 15-20% fall in natural gas supplies from KG-D6, high cost for imported
fuel resulting in the stoppage of captive power plants in Karnataka and Gujarat and
grid disturbances of 1,500MW HVDC kolar line at the start of the busy season saw
merchant rates rising to historical high levels. We agree that there is marginal pickup
in demand from pre-election spending in a few states and the impact of a cold
winter reflects the power generation growth of c.9% in January (vs. YTD April to
December growth of 5%). However, we note that India has added capacity at a
12% CAGR over the last two years vs. CAGR generation of 7%.
January data is an indicator of a sharp fall in utilization rates in India
As stated in our recent note, Caught between price and permits, we estimate that
Indian coal availability could rise at a c.6% CAGR in FY10-15E, insufficient to meet
the power capacity growth of c.10%, and operating rates (PLF) could compress by
2000bps over FY11-14E, assuming other sources of capacity do not suffer from
lack of fuel. Importantly, gas availability in Jan. fell by 15-18% for one key source
(KG-D6 basin). Hence, even at 74% utilization in Jan. 2011 (500bps below the
previous peak), Indian power plants are constrained in supplying scheduled power.
Rising fears of regulatory risk and demand destruction
The current constraints in this system could lead the regulator to revisit the entire
approach toward regulating merchant rates. Merchant rates as measured by both
the UI rates and the exchange rate for power sales fell to INR2.5/unit after the
Indian power regulator imposed a penalty of INR22/unit on any buyer who
purchases power in unscheduled markets and causes grid distribution. With UI
rates now being INR15/unit, the loss-making distribution companies could face a
severe cash crunch. This raises the risk of some cap on merchant rates. Looking at
historical cap rates of INR6-8/unit, we believe our expectation of INR4/unit is
reasonable vs. the Street’s expectation of a sharp decline.
Adani Power remains our top pick
Our preferred pick continues to be Adani Power, which has captive coal coupled
with c.50% capacity leveraged to merchant rates. Lanco Infratech has high
operating leverage from rising merchant prices, and is post-correction our top midcap
pick. Another company under our coverage that could benefit is Shree Cement
(Hold). For entities selling power through long-term arrangements, a lack of fuel
implies low availability and, a low return. Our valuation methodology for the sector
is based on an average of exit P/E and NPV at CoE 12.5%. A fall/rise in merchant
rates due to seasonal factors is the key risk. For our top picks Adani and Lanco, an
INR1kWh/unit fall in merchant rates results in earnings falling by 42% and 24%,
respectively.
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