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UBS Investment Research
India Power Utilities
15 states raised tariffs in last six months
„ Event: At least 15 states (of total 28) enacted/proposed tariff hikes
As per our analysis of available news flow and media reports, we believe that
many state governments have moved forward on power tariff hikes. Of the total 28
states in India, there are at least 15 states (80% of total consumption) which have
either enacted or proposed power tariff hikes over last six months. The key states
where tariffs have been under revision are; Karnataka (22%), Rajasthan (20%),
Orissa (20%), Bihar (19%), Jharkhand (16%), and, Chhattisgarh (14%).
„ Impact: We maintain that SEBs are unlikely to default in two-three years
We believe that reasonable and regular tariff hike by distribution companies is a
key component in keeping the State Electricity Board (SEB) losses under
manageable limits. Hence, we view the tariff hikes as a positive development. As
highlighted in our recent report, “Concerns vs. reality in Indian power sector”
dated 16 th June 2011, we continue to believe that SEBs are unlikely to default in
the next two to three years.
„ Action: We still prefer insulated names such as Power Grid in near-term
In a scenario of negative news flow on SEB financial difficulties and issues with
coal availability, we think it would be prudent for investors to look for stocks
which are not directly impacted by problems in generation sector. We believe that
Power Grid, which is a key beneficiary of growth in transmission, is a very good
choice in this space.
„ Our top pick: Power Grid, rated Buy
We prefer Power Grid and Lanco. We also have a Buy rating on NTPC, Tata
Power and Reliance Infra.
15 states raised tariffs in last six months
As per the media reports and our analysis of available news flow, we believe
that many state governments have moved forward on power tariff hikes. Of the
total 28 states in India, there are at least 15 states (80% of total consumption)
which have either enacted/proposed power tariff hikes over last six months.
The key states where tariffs have been revised or to be revised are as follows;
Karnataka (22%), Rajasthan (20%), Orissa (20%), Bihar (19%), Jharkhand
(16%), and, Chhattisgarh (14%).
Table 1: Tariff hikes across states
State Tariff hike
Karnataka 22%
Rajasthan 20%
Orissa 20%
Bihar 19%
Jharkhand 16%
Chhattisgarh 14%
Andhra Pradesh 12%
Punjab 9%
West Bengal 9%
Gujarat 8%
Assam 6%
Madhya Pradesh 6%
Uttarakhand 5%
Maharashtra 5%
Haryana 3%
Source: Media reports, UBS estimates
We believe that reasonable and regular tariff hike by distribution companies is a
key component in keeping the SEB losses under manageable limits. Hence, we
view the tariff hikes as a positive development.
As highlighted in our recent report, Concerns vs. reality in Indian power sector
dated 16
th
June 2011, we continue to believe that SEBs are unlikely to default in
the next two to three years.
SEB losses are a big concern
The issue of poor financial health and losses of SEBs got highlighted again last
week when Tamil Nadu government requested Rs400bn SEB bailout from
central government. Tamil Nadu’s SEB is one of the biggest loss-making SEBs
in the country (contributing ~20% of total financial losses of all SEBs put
together). Please refer to our note “Tamil Nadu asks for a SEB bailout” dated
16 th June 2011.
Overall, we believe that SEBs are unlikely to default in the near term (next two
to three years). Please note that the official data is only available up to FY09
when losses increased 65% YoY and crossed Rs500bn. We believe that in
FY10/11 as well, the losses are in the range of Rs550-600bn and the key reasons
are, a) short-term tariffs declined more than 50% in two years since FY09, b)
tariffs have increased 6-7% p.a. over FY10/11, and, c) AT&C losses have
declined.
Power Grid is a good choice in near-term
In a scenario of negative news flow on SEB financial difficulties and issues with
coal availability, we think it would be prudent for investors to look for stocks
which are not directly impacted by problems in generation sector.
We believe that Power Grid, which is a key beneficiary of growth in
transmission, is a very good choice in this space.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Power Utilities
15 states raised tariffs in last six months
„ Event: At least 15 states (of total 28) enacted/proposed tariff hikes
As per our analysis of available news flow and media reports, we believe that
many state governments have moved forward on power tariff hikes. Of the total 28
states in India, there are at least 15 states (80% of total consumption) which have
either enacted or proposed power tariff hikes over last six months. The key states
where tariffs have been under revision are; Karnataka (22%), Rajasthan (20%),
Orissa (20%), Bihar (19%), Jharkhand (16%), and, Chhattisgarh (14%).
„ Impact: We maintain that SEBs are unlikely to default in two-three years
We believe that reasonable and regular tariff hike by distribution companies is a
key component in keeping the State Electricity Board (SEB) losses under
manageable limits. Hence, we view the tariff hikes as a positive development. As
highlighted in our recent report, “Concerns vs. reality in Indian power sector”
dated 16 th June 2011, we continue to believe that SEBs are unlikely to default in
the next two to three years.
„ Action: We still prefer insulated names such as Power Grid in near-term
In a scenario of negative news flow on SEB financial difficulties and issues with
coal availability, we think it would be prudent for investors to look for stocks
which are not directly impacted by problems in generation sector. We believe that
Power Grid, which is a key beneficiary of growth in transmission, is a very good
choice in this space.
„ Our top pick: Power Grid, rated Buy
We prefer Power Grid and Lanco. We also have a Buy rating on NTPC, Tata
Power and Reliance Infra.
15 states raised tariffs in last six months
As per the media reports and our analysis of available news flow, we believe
that many state governments have moved forward on power tariff hikes. Of the
total 28 states in India, there are at least 15 states (80% of total consumption)
which have either enacted/proposed power tariff hikes over last six months.
The key states where tariffs have been revised or to be revised are as follows;
Karnataka (22%), Rajasthan (20%), Orissa (20%), Bihar (19%), Jharkhand
(16%), and, Chhattisgarh (14%).
Table 1: Tariff hikes across states
State Tariff hike
Karnataka 22%
Rajasthan 20%
Orissa 20%
Bihar 19%
Jharkhand 16%
Chhattisgarh 14%
Andhra Pradesh 12%
Punjab 9%
West Bengal 9%
Gujarat 8%
Assam 6%
Madhya Pradesh 6%
Uttarakhand 5%
Maharashtra 5%
Haryana 3%
Source: Media reports, UBS estimates
We believe that reasonable and regular tariff hike by distribution companies is a
key component in keeping the SEB losses under manageable limits. Hence, we
view the tariff hikes as a positive development.
As highlighted in our recent report, Concerns vs. reality in Indian power sector
dated 16
th
June 2011, we continue to believe that SEBs are unlikely to default in
the next two to three years.
SEB losses are a big concern
The issue of poor financial health and losses of SEBs got highlighted again last
week when Tamil Nadu government requested Rs400bn SEB bailout from
central government. Tamil Nadu’s SEB is one of the biggest loss-making SEBs
in the country (contributing ~20% of total financial losses of all SEBs put
together). Please refer to our note “Tamil Nadu asks for a SEB bailout” dated
16 th June 2011.
Overall, we believe that SEBs are unlikely to default in the near term (next two
to three years). Please note that the official data is only available up to FY09
when losses increased 65% YoY and crossed Rs500bn. We believe that in
FY10/11 as well, the losses are in the range of Rs550-600bn and the key reasons
are, a) short-term tariffs declined more than 50% in two years since FY09, b)
tariffs have increased 6-7% p.a. over FY10/11, and, c) AT&C losses have
declined.
Power Grid is a good choice in near-term
In a scenario of negative news flow on SEB financial difficulties and issues with
coal availability, we think it would be prudent for investors to look for stocks
which are not directly impacted by problems in generation sector.
We believe that Power Grid, which is a key beneficiary of growth in
transmission, is a very good choice in this space.
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