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UBS Investment Research
India Power Utilities
Concerns vs. reality in Indian power sector
Event: newsflow and investor perception have become worse
As per media reports and on the basis of our interactions with clients, we think the
perception on the outlook for the Indian power sector has become worse. The key
issues are as follows: a) State Electricity Board (SEB) losses and the recent request
by Tamil Nadu for a bailout package for its SEB from the Central Government; b)
lack of domestic coal availability and recent newsflow on regulation for Indonesian
supply; and c) a high interest rate environment and issues with the availability of
financing.
Impact: no quick-fix solutions but we think the situation is not that bad
We believe SEBs are unlikely to default in the next two to three years as: a) shortterm
tariffs have declined more than 50% in the two years since FY09; b) tariffs
have increased 6-7% p.a. over FY10/11; and c) AT&C losses have declined. On
coal, we think it is a concern but there is no impending disaster as captive coal
production could see a significant increase in the medium term (>100MT in FY15).
Action: we prefer low-risk names such as Power Grid for the near term
We are confident of the attractiveness of the Indian power sector for medium- to
long-term investors. However, in the near-term scenario of increased negative
newsflow, it may be prudent for investors to look for stocks that are not directly
impacted by issues in generation. We believe that Power Grid, which is a key
beneficiary of growth in transmission, is a very good choice in this space.
Our top picks: Power Grid and Lanco, both rated Buy
We prefer Power Grid and Lanco. We also have Buy ratings on NTPC, Tata
Power, and Reliance Infra.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Power Utilities
Concerns vs. reality in Indian power sector
Event: newsflow and investor perception have become worse
As per media reports and on the basis of our interactions with clients, we think the
perception on the outlook for the Indian power sector has become worse. The key
issues are as follows: a) State Electricity Board (SEB) losses and the recent request
by Tamil Nadu for a bailout package for its SEB from the Central Government; b)
lack of domestic coal availability and recent newsflow on regulation for Indonesian
supply; and c) a high interest rate environment and issues with the availability of
financing.
Impact: no quick-fix solutions but we think the situation is not that bad
We believe SEBs are unlikely to default in the next two to three years as: a) shortterm
tariffs have declined more than 50% in the two years since FY09; b) tariffs
have increased 6-7% p.a. over FY10/11; and c) AT&C losses have declined. On
coal, we think it is a concern but there is no impending disaster as captive coal
production could see a significant increase in the medium term (>100MT in FY15).
Action: we prefer low-risk names such as Power Grid for the near term
We are confident of the attractiveness of the Indian power sector for medium- to
long-term investors. However, in the near-term scenario of increased negative
newsflow, it may be prudent for investors to look for stocks that are not directly
impacted by issues in generation. We believe that Power Grid, which is a key
beneficiary of growth in transmission, is a very good choice in this space.
Our top picks: Power Grid and Lanco, both rated Buy
We prefer Power Grid and Lanco. We also have Buy ratings on NTPC, Tata
Power, and Reliance Infra.
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