Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Getting more defensive
NTPC and Power Grid have underperformed Sensex by c.27-30% in last
two years. While power sector in India does face challenge of rising state
utility losses and coal shortages, we believe these two companies will be
least impacted by those concerns. We upgrade NTPC to BUY with over
20% upside to target and Power Grid to O-PF. These along with Tata
Power, which is net long on coal, are our top picks in the sector. We are
also factoring in further constrains on coal supplies for Adani Power,
Lanco and JSW Energy and thus cutting our below consensus earnings
estimates by 4-16% and slashing their target prices.
NTPC and Power Grid better placed in a coal short environment
‰ We expect a pick-up in capacity addition for NTPC which should translate into 12%
EPS cagr over FY11-14. Though coal availability would be an issue, we believe NTPC
is better placed to handle that risk than other utilities.
‰ Most of the NTPC’s power projects are close to the coal mines (owned by Coal
India) with dedicated merry-go-round railway facility and NTPC owned railway
rakes (1 rake = 56 wagons). Other coal consumers do not have this facility. We
believe NTPC would remain a preferred customer for future coal allocations. Also,
most of NTPC’s profitability depends on availability of plants and not utilisation.
‰ Power Grid is immune to fuel related uncertainties which are plaguing the power
generators. Though fuel shortages, could delay commissioning of some of its
projects. We are already factoring in a discount to management’s targeted capex.
We expect around 16% earnings growth over FY12-14.
Earnings cut to factor in lower utilization rates
‰ We are cutting earnings for power generators to factor in lower utilization rates and
lower incentives for power projects given the shortfall in coal and gas supplies.
‰ We have assumed higher cuts for utilization rates for merchant plants as it is likely
that they will get a lower priority for fuel supply (both coal and gas) in the future.
‰ This has lead to 4-16% earnings cut for Adani Power, 4-7% cut for JSW Energy, 4-
10% cut for Lanco. We have also lowered utilisation levels for NTPC but earnings
impact is small at 1-2%.
Change in target prices
‰ We have cut our target prices for Adani Power, Lanco and JSW Energy to reflect the
earnings cut.
‰ We have further increased the discount to the fair value for Lanco due to the
uncertainty regarding the gas and coal supplies for its merchant power plants.
‰ We have also increased the discount rate for CESC and now factoring in increased
debt levels at the retail subsidiary resulting in a sharp reduction in target price.
Clarity on coal supplies would be the key for stocks
‰ FY12 should be a tough year for power utilities which have commissioned new
power capacities in the last two years and are dependent on domestic coal.
‰ The future performance of the utilities would be dependent on what actions are
taken at the policy level to diffuse the current coal shortfall situation for power
projects.
‰ The next EGoM meeting to discuss the coal supplies to the power sector is
scheduled for 2nd July, 2011. It is expected that some clarity would emerge on the
quantum of expected coal supplies to the various power projects for the companies.
‰ However, given the delays in various other contentious decisions by the
government, this issue too may remain hanging for a while.
‰ We prefer companies with less coal risk – NTPC, Tata Power and Power Grid.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Getting more defensive
NTPC and Power Grid have underperformed Sensex by c.27-30% in last
two years. While power sector in India does face challenge of rising state
utility losses and coal shortages, we believe these two companies will be
least impacted by those concerns. We upgrade NTPC to BUY with over
20% upside to target and Power Grid to O-PF. These along with Tata
Power, which is net long on coal, are our top picks in the sector. We are
also factoring in further constrains on coal supplies for Adani Power,
Lanco and JSW Energy and thus cutting our below consensus earnings
estimates by 4-16% and slashing their target prices.
NTPC and Power Grid better placed in a coal short environment
‰ We expect a pick-up in capacity addition for NTPC which should translate into 12%
EPS cagr over FY11-14. Though coal availability would be an issue, we believe NTPC
is better placed to handle that risk than other utilities.
‰ Most of the NTPC’s power projects are close to the coal mines (owned by Coal
India) with dedicated merry-go-round railway facility and NTPC owned railway
rakes (1 rake = 56 wagons). Other coal consumers do not have this facility. We
believe NTPC would remain a preferred customer for future coal allocations. Also,
most of NTPC’s profitability depends on availability of plants and not utilisation.
‰ Power Grid is immune to fuel related uncertainties which are plaguing the power
generators. Though fuel shortages, could delay commissioning of some of its
projects. We are already factoring in a discount to management’s targeted capex.
We expect around 16% earnings growth over FY12-14.
Earnings cut to factor in lower utilization rates
‰ We are cutting earnings for power generators to factor in lower utilization rates and
lower incentives for power projects given the shortfall in coal and gas supplies.
‰ We have assumed higher cuts for utilization rates for merchant plants as it is likely
that they will get a lower priority for fuel supply (both coal and gas) in the future.
‰ This has lead to 4-16% earnings cut for Adani Power, 4-7% cut for JSW Energy, 4-
10% cut for Lanco. We have also lowered utilisation levels for NTPC but earnings
impact is small at 1-2%.
Change in target prices
‰ We have cut our target prices for Adani Power, Lanco and JSW Energy to reflect the
earnings cut.
‰ We have further increased the discount to the fair value for Lanco due to the
uncertainty regarding the gas and coal supplies for its merchant power plants.
‰ We have also increased the discount rate for CESC and now factoring in increased
debt levels at the retail subsidiary resulting in a sharp reduction in target price.
Clarity on coal supplies would be the key for stocks
‰ FY12 should be a tough year for power utilities which have commissioned new
power capacities in the last two years and are dependent on domestic coal.
‰ The future performance of the utilities would be dependent on what actions are
taken at the policy level to diffuse the current coal shortfall situation for power
projects.
‰ The next EGoM meeting to discuss the coal supplies to the power sector is
scheduled for 2nd July, 2011. It is expected that some clarity would emerge on the
quantum of expected coal supplies to the various power projects for the companies.
‰ However, given the delays in various other contentious decisions by the
government, this issue too may remain hanging for a while.
‰ We prefer companies with less coal risk – NTPC, Tata Power and Power Grid.
No comments:
Post a Comment