20 July 2011

India Power: Reform? Happy to wait for execution :: Macquarie Research,

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India Power: Reform?
Happy to wait for execution
Event
 The Ministry of Power published feedback from the State Power Minister‟s
Conference, highlighting, “In a unanimous adopted resolution, the Conference
agreed upon a set of measures to bring down the distribution losses.”
 Despite highlighting good ideas to tackle distribution reform, we struggle to
see what has really changed to the medium-term sector outlook. In our view,
there is often a „rhetoric-implementation‟ gap in Indian Government power
policy and hence we find it difficult to see what all the fuss in the market is
about.
 We still prefer to avoid IPPs such as JSW Energy (JSW IN, Rs.76,
Underperform, TP: Rs56), with Adani Power (ADANI IN, Rs111, Neutral, TP:
Rs116) our preferred exposure. CESC (CESC IN, Rs.341, Outperform, TP:
Rs.381) remains our preferred mid-cap in the space. Despite rising 20% over
the past two weeks, we still see further 10–15% potential upside from current
prices.
Impact
 Beware the „Rhetoric-Implementation gap,‟ to copy a phrase used in a
must-read World Bank report on the Indian power sector in 2006. While
lowering distribution losses to 15%, as highlighted by the Union Power
Minister, would certainly be a major positive for the sector, it should be noted
that Government power policy rarely gets implemented as planned (Power for
All: 2012, APDRP, R-APDRP).
 We need more ongoing tariff hikes…now: One pushback to soften the SEB
loss scenario is that most of the losses are concentrated in a handful of SEBs.
This is true (as per FY09 data); however, these states still represent 44% of
total power demand and 37% of bilateral buying volumes in FY11, so it‟s
difficult to ignore its materiality. On our analysis, these states will likely require
~20%pa tariff hikes over three consecutive years before eroding annual
losses. This could continue to put strain on power demand.
 Private sector says “wait and see”, Govt confident of change: From
speaking with a number of industry sources during the day, most private
sector participants appeared more cautious on the press release noting that
any implementation by the states would likely take time, and opt for a „wait
and see‟ approach. Government sources were more confident in reform.
Chatting with ex Power Secretary RV Shahi, he highlighted that states will
take this seriously due to building pressure from the power ministry.
Outlook
 No change to outlook.

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