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Indian utilities - merchant power
Bullish April fwd curve + data points
Event
And up it goes. Both volume and forward power price got a kick up the curve
in April with 96% of total volume contracted >Rs.4/kWh. A positive data point
from power traders over the week was that 600MW of merchant capacity had
been contracted for 1yr from July-11 at Rs.4.70/kWh – a positive result vs. our
FY12 forecast at Rs.4.00/kWh. It begs the question, with such an important
State election for Congress in 1Q13, will UP’s appetite for merchant (UP
base-load deficit -17% in FY10) be the talking point of FY12?
News flow from bilateral power buyers Punjab (tariff hikes), Delhi (talking
tough on load shedding) and Tamil Nadu (Jayalalitha win) seemed to be
positive for power, while stranded coal-fired units of DVC and new power
plant policy from CEA (new plants to be built for 30% import blend) continued
to highlight the biggest near term risk of IPPs – fuel supply.
Speaking about fuel shortage concerns, we do a scenario analysis on Adani
Power’s Tiroda project, which suggests that even using 60% imported coal at
US$120/t FOB, the contract it has with MSECL breaks even (not including the
merchant sales that will likely boost the projects ROE) – Outperform.
Impact
April contract volumes 5.6x higher than March: with an implied power
price of Rs.4.02/kWh in June (similar to March fwd curve) while in July-August
prices were stuck at Rs.4.56/kWh – bullish for early monsoon months with
new merchant capacities coming up.
Positive data points: such as a 1yr 600MW merchant contract at
Rs.4.70/kWh with UP and potentially positive signs from State Governments:
Punjab (11% of merchant market*): PSERC increased tariffs by 9.2% to
both domestic and agricultural customers, halving its revenue/cost gap.
Delhi (12% of merchant market*): reports implied DERC would take
‘serious action’ against discoms resorting to loadshedding. As one power
trader commented, however, ‘this sort of bravado is shown by regulators
only against privately held discoms’. They have a good point.
Tamil Nadu (14% of merchant market*): with Jayalalitha winning the TN
State election, power tariffs in the State may now rise (positive). We also
understand that renegade buying leading up to the TN State election has
led to delayed power payments to genco’s who supplied to the state,
which may also put pressure on tariff increases.
Outlook
Over the past week we have seen some positive newsflow for power markets.
Our preferred IPP remains Adani Power due to its strong volume growth over
FY12, competitive cost position (fuel cost ~1/kWh in FY11) and attractive
valuation (8x FY13E NPAT). In this market we also like defensive names with
growth optionality such as Tata Power (large cap) and CESC (mid cap).
*buyers of bilateral power market over past 12 months
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian utilities - merchant power
Bullish April fwd curve + data points
Event
And up it goes. Both volume and forward power price got a kick up the curve
in April with 96% of total volume contracted >Rs.4/kWh. A positive data point
from power traders over the week was that 600MW of merchant capacity had
been contracted for 1yr from July-11 at Rs.4.70/kWh – a positive result vs. our
FY12 forecast at Rs.4.00/kWh. It begs the question, with such an important
State election for Congress in 1Q13, will UP’s appetite for merchant (UP
base-load deficit -17% in FY10) be the talking point of FY12?
News flow from bilateral power buyers Punjab (tariff hikes), Delhi (talking
tough on load shedding) and Tamil Nadu (Jayalalitha win) seemed to be
positive for power, while stranded coal-fired units of DVC and new power
plant policy from CEA (new plants to be built for 30% import blend) continued
to highlight the biggest near term risk of IPPs – fuel supply.
Speaking about fuel shortage concerns, we do a scenario analysis on Adani
Power’s Tiroda project, which suggests that even using 60% imported coal at
US$120/t FOB, the contract it has with MSECL breaks even (not including the
merchant sales that will likely boost the projects ROE) – Outperform.
Impact
April contract volumes 5.6x higher than March: with an implied power
price of Rs.4.02/kWh in June (similar to March fwd curve) while in July-August
prices were stuck at Rs.4.56/kWh – bullish for early monsoon months with
new merchant capacities coming up.
Positive data points: such as a 1yr 600MW merchant contract at
Rs.4.70/kWh with UP and potentially positive signs from State Governments:
Punjab (11% of merchant market*): PSERC increased tariffs by 9.2% to
both domestic and agricultural customers, halving its revenue/cost gap.
Delhi (12% of merchant market*): reports implied DERC would take
‘serious action’ against discoms resorting to loadshedding. As one power
trader commented, however, ‘this sort of bravado is shown by regulators
only against privately held discoms’. They have a good point.
Tamil Nadu (14% of merchant market*): with Jayalalitha winning the TN
State election, power tariffs in the State may now rise (positive). We also
understand that renegade buying leading up to the TN State election has
led to delayed power payments to genco’s who supplied to the state,
which may also put pressure on tariff increases.
Outlook
Over the past week we have seen some positive newsflow for power markets.
Our preferred IPP remains Adani Power due to its strong volume growth over
FY12, competitive cost position (fuel cost ~1/kWh in FY11) and attractive
valuation (8x FY13E NPAT). In this market we also like defensive names with
growth optionality such as Tata Power (large cap) and CESC (mid cap).
*buyers of bilateral power market over past 12 months
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