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Defensives outperformed in May, but private IPPs lagged with each
having its own issue. Adani (potential increase in Indonesian coal costs),
Lanco (A$3.5B lawsuit filed by Perdaman, Australia), JSW (weak
execution & increasing coal costs), RPWR (issues on execution of
Krishnapatnam and Indo coal pricing) and JPVL (despite commissioning of
Karcham Wangtoo) all underperfomed the market. On the other hand
defensives like NTPC, TPWR and PWGR outperformed. NTPC, with the
commissioning of its first supercritical unit at Sipat, outperformed despite
negative news on de-allocation of coal blocks.
Declining power demand and deficit do not bode well for short-term
power prices. Power demand growth and deficit continued their yoy
downward trend in May. Despite May being a peak summer month, deficit
numbers were down MoM as well. We attribute slower demand growth to
discretionary backing down by SEB’s amidst rising fuel costs.
PLFs for relatively high cost gencos decline in June, implying a)
reluctance of SEBs to purchase expensive power and b) higher hydro
generation, as seen for JPVL. PLFs for the more expensive imported coal
based plants like Lanco’s Udupi, JSW's all three plants and Adani’s Mundra
(despite a lower fuel cost than others) were weak in June. RPWR's Rosa
(blends imported coal) was the only exception. Production of expensive gas
based power declined too – eg: Lanco’s Kondapalli, GVK, GMR’s Vemagiri
as well as NTPC’s gas based plants. Performance of domestic coal based
plants of NTPC and JSPL was relatively strong.
We remain cautious on IPPs pending a resolution to the coal deficit. The
meeting called by the PM to implement changes to the coal allocation policy
has been postponed to July 6. Any resolution to improve supply will be a
positive for the sector. Until then we prefer defensive plays like TPWR and
PWGR. Adani remains our top pick due to strong execution.
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