Indian utilities - merchant power - Monsoon prices tighten::Macquarie Research,

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Indian utilities - merchant power
Monsoon prices tighten
Event
􀂃 It’s been a couple of months since we’ve seen a published forward curve from
the CERC but the one published this week implies ~Rs.1/kWh dip in bilateral
power prices over monsoon months (August – September). Bilateral volumes
slumped 71% from April to May, and while 96% of contracts in April were
priced >Rs.4/kWh, only 28% of total volume in May was contracted
>Rs.4/kWh.
􀂃 We still prefer to avoid IPPs, including JSW Energy (JSW IN, Rs68.80,
Underperform, TP: Rs56.00) and Lanco Infratech (LANCI IN, Rs24.50). Within
the space, Adani Power (ADANI IN, Rs110.50, Neutral, TP: Rs116.00)
remains our preferred exposure. According to industry sources, there remains
a lack of visible demand coming from SEBs, while significant upcoming untied
capacities with fuel security and ongoing upward pressure on fuel costs keeps
us Underweight Utilities.
Impact
􀂃 Forward curve shaves off Rs1/kWh in Aug-Sept: While bilateral volumes
were lighter than April, down 71%, it was off a massive base. May volume of
2,737GWh is close to the 10-month average (when the survey commenced)
of 3,080GWh. Most of the bilateral contracts appeared to be back ended in
May, so we’d expect the low pricing outlook to continue into June/July.
􀂃 Recent tariff increases mostly noise, doesn’t save the day for SEBs: As
noted by Tata Power (TPWR IN, Rs1,314.30, Outperform, TP: Rs1,553.00,
Jeff Evans) senior management, who we were travelling with over the past
week, it’s difficult for most SEBs to increase tariffs any more than 10-12% pa,
which doesn’t solve the loss scenario for many years. A private discom we
met last week highlighted that noise around enforcing a 'duty to serve' is
selectively being put on the private discom, while there is little action towards
State Govt discoms – where the losses are.
􀂃 “If anything, conditions are getting worse”… was the key takeaway from
industry meetings over the past few weeks. 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 doesn’t expect industrial demand to absorb
supply on the exchange anytime soon.
Outlook
􀂃 While 1Q11 earnings may likely be supported by higher summer pricing,
heading into a seasonal weaker pricing period, we’d be cautious on merchant
power exposure.