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India: Utilities
Equity Research
ST rates: More downside risk; but volumes may rise at lower prices
Short term (ST) rates likely to average Rs4.5/kwh in 1Q; forward
curve indicates rates may drop to Rs3.5/kwh by Sept 2011
ST rates for 1QFY12 are likely to average around Rs4.5/kwh (Rs4.6/kwh for
April-May 2011), which is in line with our estimates. However, the forward
curve for 2QFY12 (published by CERC) indicates that rates may drop to
Rs3.5/kwh and we expect it to remain subdued in 3Q due to: 1) seasonally
weak winter season; 2) momentum in capacity additions. Although
demand for 4Q is largely contingent on state elections (UP and Punjab), we
believe higher supplies of cheaper power under PPAs may cap ST rates.
Volume growth trend suggests demand pick up on declining rates
Our analysis of volume growth across the ST market suggests that, not
withstanding deteriorating finances of SEBs, demand for ST power would rise
with declining rates. Further, concentration of purchases of top 5 states
(particularly in the bilateral segment) has declined from 72% in Jan 2009 to
about 64% in May 2011. We expect more states to participate in ST market
which could help reduce their average cost of power purchase.
Analysis of power purchase costs for Top 10 states indicates that
demand could be sustained at Rs3.2-3.5/kwh
Our analysis of regulatory filings by discoms of Top 10 states (which are
major participants in the ST market) indicates that they plan to purchase
about 15% of their power for FY12E from IPPs and expensive sources.
Some of the major states have budgeted to purchase this power at rates
ranging between Rs3.5-4.0/kwh. While our long-term assumption for ST
rates is about Rs3.2/kwh, we believe discoms will start seeing benefits of
participation in the ST market when rates range between Rs3.2-3.5/kwh.
Reduce FY12E ST forecasts by about 6% to Rs3.75/kwh; Cut FY12E
EPS by 6%-16% and fine-tune 12-m TPs
We believe ST rates for 2Q-4Q FY12 will range about Rs3.50/kwh, averaging
the FY12 rate at about Rs3.75/kwh vs our previous estimate of Rs4/kwh. Our
calculations indicate Adani Power, Lanco Infratech, and JSW Energy have
1%/1.3%/2.6% FY12E EPS sensitivity to a 1% change in ST ranges. We reduce
our FY12E-FY14E EPS by up to 16% to reflect lower realizations from the ST
market and our 12-m SOTP-based TPs by 1%-3%. We continue to believe that
participation in the ST market will improve near-term cash flows for funding
future capex. Maintain Buy on Lanco, Adani and Neutral on JSW.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Utilities
Equity Research
ST rates: More downside risk; but volumes may rise at lower prices
Short term (ST) rates likely to average Rs4.5/kwh in 1Q; forward
curve indicates rates may drop to Rs3.5/kwh by Sept 2011
ST rates for 1QFY12 are likely to average around Rs4.5/kwh (Rs4.6/kwh for
April-May 2011), which is in line with our estimates. However, the forward
curve for 2QFY12 (published by CERC) indicates that rates may drop to
Rs3.5/kwh and we expect it to remain subdued in 3Q due to: 1) seasonally
weak winter season; 2) momentum in capacity additions. Although
demand for 4Q is largely contingent on state elections (UP and Punjab), we
believe higher supplies of cheaper power under PPAs may cap ST rates.
Volume growth trend suggests demand pick up on declining rates
Our analysis of volume growth across the ST market suggests that, not
withstanding deteriorating finances of SEBs, demand for ST power would rise
with declining rates. Further, concentration of purchases of top 5 states
(particularly in the bilateral segment) has declined from 72% in Jan 2009 to
about 64% in May 2011. We expect more states to participate in ST market
which could help reduce their average cost of power purchase.
Analysis of power purchase costs for Top 10 states indicates that
demand could be sustained at Rs3.2-3.5/kwh
Our analysis of regulatory filings by discoms of Top 10 states (which are
major participants in the ST market) indicates that they plan to purchase
about 15% of their power for FY12E from IPPs and expensive sources.
Some of the major states have budgeted to purchase this power at rates
ranging between Rs3.5-4.0/kwh. While our long-term assumption for ST
rates is about Rs3.2/kwh, we believe discoms will start seeing benefits of
participation in the ST market when rates range between Rs3.2-3.5/kwh.
Reduce FY12E ST forecasts by about 6% to Rs3.75/kwh; Cut FY12E
EPS by 6%-16% and fine-tune 12-m TPs
We believe ST rates for 2Q-4Q FY12 will range about Rs3.50/kwh, averaging
the FY12 rate at about Rs3.75/kwh vs our previous estimate of Rs4/kwh. Our
calculations indicate Adani Power, Lanco Infratech, and JSW Energy have
1%/1.3%/2.6% FY12E EPS sensitivity to a 1% change in ST ranges. We reduce
our FY12E-FY14E EPS by up to 16% to reflect lower realizations from the ST
market and our 12-m SOTP-based TPs by 1%-3%. We continue to believe that
participation in the ST market will improve near-term cash flows for funding
future capex. Maintain Buy on Lanco, Adani and Neutral on JSW.
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