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India power: merchant prices
Pricing outlook remains soft
Event
The CERC fwd curve released late last week suggests weaker pricing will be
a reality in 2Q12, averaging around Rs.3.70/kWh for the next three months.
This could see higher cost operators struggle in 2Q12, such as newer gasfired
units (LANCI IN, 17, Unrated) and imported coal based plant (JSW IN,
57, Underperform, TP: 55). We also touch on some industry feedback below.
Impact
July volumes fall, average three month price Rs.3.70/kWh: July saw a
62% decline in reported contract volume, while 78% of power contracted was
below Rs.4.00/kWh (in-line with June at 80%). Of the 52 contracts in July,
34% were GMR trading, 19% NTPC trading, 10% PTC, 8% JSW trading.
Chat with Ratings Agency: similar to us, they remain bearish on the sector
and believe that loans will go bad (NPLs). While acknowledging it is hard to
predict the extent of defaults, they commented that around 10% would
certainly be reasonable. Material ratings downgrades may not occur for a year
or so, simply due to many of the projects still being under construction. The
outcome in their view? Everyone is likely to take a little - consumers will pay
more for power, some developers won't make it and banks will have to
restructure bad loans.
SEB's keeping it in the family: another trend that has been apparent over
the past two years is the increasing level of bilateral power trading between
discoms (33% of bilateral power traded in June - all time high vs 18% in
1Q10, 24% in 1Q11). That is, discoms trade power between themselves to
manage their respective peak loads at lower prices, rather than pay higher
prices to traders/gencos. An efficient tool for discoms, but it has the impact of
taking demand out of the system and softening prices.
Merchant price drops in June to lowest in 3yrs: the weighted bilateral
merchant price in June was Rs.3.82/kWh, the lowest monthly price over
the past few years. Seasonally, the bilateral price usually drops further in
July/August/September and therefore we expect lower prices to flow
through into 2Q12 – as implied in CERC fwd curve.
Outlook
Retain Underweight Utilities leading into 2Q12.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India power: merchant prices
Pricing outlook remains soft
Event
The CERC fwd curve released late last week suggests weaker pricing will be
a reality in 2Q12, averaging around Rs.3.70/kWh for the next three months.
This could see higher cost operators struggle in 2Q12, such as newer gasfired
units (LANCI IN, 17, Unrated) and imported coal based plant (JSW IN,
57, Underperform, TP: 55). We also touch on some industry feedback below.
Impact
July volumes fall, average three month price Rs.3.70/kWh: July saw a
62% decline in reported contract volume, while 78% of power contracted was
below Rs.4.00/kWh (in-line with June at 80%). Of the 52 contracts in July,
34% were GMR trading, 19% NTPC trading, 10% PTC, 8% JSW trading.
Chat with Ratings Agency: similar to us, they remain bearish on the sector
and believe that loans will go bad (NPLs). While acknowledging it is hard to
predict the extent of defaults, they commented that around 10% would
certainly be reasonable. Material ratings downgrades may not occur for a year
or so, simply due to many of the projects still being under construction. The
outcome in their view? Everyone is likely to take a little - consumers will pay
more for power, some developers won't make it and banks will have to
restructure bad loans.
SEB's keeping it in the family: another trend that has been apparent over
the past two years is the increasing level of bilateral power trading between
discoms (33% of bilateral power traded in June - all time high vs 18% in
1Q10, 24% in 1Q11). That is, discoms trade power between themselves to
manage their respective peak loads at lower prices, rather than pay higher
prices to traders/gencos. An efficient tool for discoms, but it has the impact of
taking demand out of the system and softening prices.
Merchant price drops in June to lowest in 3yrs: the weighted bilateral
merchant price in June was Rs.3.82/kWh, the lowest monthly price over
the past few years. Seasonally, the bilateral price usually drops further in
July/August/September and therefore we expect lower prices to flow
through into 2Q12 – as implied in CERC fwd curve.
Outlook
Retain Underweight Utilities leading into 2Q12.
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