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Power Finance Corp
Reforms on the cards?
The Economic Survey 2010-11 stressed the need to bring key reforms to the
power sector going forward. We believe any step in this direction will address
concerns over mounting SEB losses. Given the recent share price correction,
valuations have become attractive, in our view. We upgrade to Buy.
Economic Survey 2010-11: Taking stock of power sector reforms to date
The Economic Survey outlined key reforms (the entry of private independent power
producers, Electricity Act 2003, unbundling of generation, transmission and distribution
companies) in the power sector. However, the paper stated that reforms remained
incomplete and performance lagged accelerating demand, given massive future investment
requirements and the critical role of the power sector in sustaining growth. Also, it stated that
unmetered and unaccounted for sale is about 35% and is among the highest in the world.
This is draining public revenues, forcing larger price increase requirements, and causing
massive losses (combined annual losses of the SEBs are about 1% of GDP).
Economic Survey 2010-11: three key reforms required going forward
1) Strengthening regulation: the worldwide evidence suggests that electricity reform works
only in the presence of strong, independent regulators, insulated from political and
commercial pressures; 2) improving distribution and opening bulk supply to competition: in
India, most power distribution is still the monopoly of SEBs, with mounting losses and poor
services. Three possible models are public private partnership (PPP) mode with open
access, distribution franchisee mode and performance-based state electricity discoms; 3)
revising tariffs to more economic levels: the current tariffs levels are unsustainable, cannot
elicit needed investments, drain resources, and are not targeted at the poor. India currently
has some of the lowest and most uneconomic average electricity tariffs in the world – 8
cents/kwh at retail level, compared to about 12-15 cents/kwh in countries much betterendowed with coal or gas energy (Canada, South Africa, the US), and 19-20 cents/kwh
elsewhere (much of Europe, developing countries).
No change in earnings; focus on power sector reforms is positive; upgrade to Buy
We keep our earnings estimates unchanged and, hence, make no material change in our
target price, which we raise to Rs272 (from Rs269). However, we now factor in 15% equity
dilution in FY12 at Rs250 per share (from Rs300). At our target price, PFC will trade at
11.6xFY12F earnings and 1.6x FY12F book value
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Power Finance Corp
Reforms on the cards?
The Economic Survey 2010-11 stressed the need to bring key reforms to the
power sector going forward. We believe any step in this direction will address
concerns over mounting SEB losses. Given the recent share price correction,
valuations have become attractive, in our view. We upgrade to Buy.
Economic Survey 2010-11: Taking stock of power sector reforms to date
The Economic Survey outlined key reforms (the entry of private independent power
producers, Electricity Act 2003, unbundling of generation, transmission and distribution
companies) in the power sector. However, the paper stated that reforms remained
incomplete and performance lagged accelerating demand, given massive future investment
requirements and the critical role of the power sector in sustaining growth. Also, it stated that
unmetered and unaccounted for sale is about 35% and is among the highest in the world.
This is draining public revenues, forcing larger price increase requirements, and causing
massive losses (combined annual losses of the SEBs are about 1% of GDP).
Economic Survey 2010-11: three key reforms required going forward
1) Strengthening regulation: the worldwide evidence suggests that electricity reform works
only in the presence of strong, independent regulators, insulated from political and
commercial pressures; 2) improving distribution and opening bulk supply to competition: in
India, most power distribution is still the monopoly of SEBs, with mounting losses and poor
services. Three possible models are public private partnership (PPP) mode with open
access, distribution franchisee mode and performance-based state electricity discoms; 3)
revising tariffs to more economic levels: the current tariffs levels are unsustainable, cannot
elicit needed investments, drain resources, and are not targeted at the poor. India currently
has some of the lowest and most uneconomic average electricity tariffs in the world – 8
cents/kwh at retail level, compared to about 12-15 cents/kwh in countries much betterendowed with coal or gas energy (Canada, South Africa, the US), and 19-20 cents/kwh
elsewhere (much of Europe, developing countries).
No change in earnings; focus on power sector reforms is positive; upgrade to Buy
We keep our earnings estimates unchanged and, hence, make no material change in our
target price, which we raise to Rs272 (from Rs269). However, we now factor in 15% equity
dilution in FY12 at Rs250 per share (from Rs300). At our target price, PFC will trade at
11.6xFY12F earnings and 1.6x FY12F book value
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