India Utilities - Still tough Premature speculation:: Macquarie Research,

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India Utilities - Still tough
Premature speculation
Event
 Feedback from industry contacts on the ground still point to worsening
conditions regarding India power demand and pricing. We think newfound
optimism on speculated improved health of the power sector due to potential
tariff hikes at State Electricity Boards (SEB’s) could prove premature.
 Indian power stocks have been treading water over the past month, although
we see further potential downside. Remember, these are highly geared assets
(70–80% debt) and ~30% fall in equity value (average over last 12 months) is
only a 5–10% correction in asset values despite a material shift in fuel price
and power price expectations. We downgrade JSW Energy to
Underperform and reduce Adani Power, our preferred IPP, to Neutral.
Impact
 “If anything, conditions are getting worse…” was the key takeaway from
industry meetings over the last week. Weaker demand from SEBs was the
key issue in all meetings, with key power buying states not in the market
(merchant or Case 1 bids). Price expectations from traders over the next 12
months have fallen from ~Rs.4/kWh three months ago to Rs.3.30–3.80/kWh.
Appetite from some seasonal monsoon buyers (Haryana/Delhi) is expected to
be weaker this year, while new supply is expected to overload both bilateral
and exchange markets. The IEX does not expect industrial demand to absorb
supply on the exchange anytime soon, while some traders continue to think
that the lack of distribution investment is as big a threat as fuel supply.
 CEA to prioritise coal to older projects, 325–330mt in FY12 bullish: we
understand that the CEA is currently allocating coal based on age of plant,
giving preference to plant commissioned in FY10 over FY11/12 capacity.
Ministry officials believe that coal delivery of 330mt by CIL to the power sector
in FY12 would be a bull case (CIL’s target: 343mt) while thermal PLF could
fall from ~77% to ~70%.
 Longer-term thematic still strong – lack of investment: Due to many
sector uncertainties, no developer we met is considering new investments. In
our view, this could lead to a peak in capacity additions in 2–3 years – also
backed by project announcement data. While the longer-term demand-supply
thematic may be strong, short-medium term pain is likely to prevail on stocks.
Outlook
 Sector conditions remain tough and in our view, this still isn’t reflected in
either earnings results or market forecasts. This will create further downside
for these stocks, in our view. We downgrade Adani Power to Neutral (from
Outperform) and JSW Energy to Underperform (from Neutral).