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Indian Utilities: risk reminder
Beta and leverage snapshot
Event
Utilities are often seen as one of the most defensive GIC sectors and
therefore achieve plenty of attention in bearish markets. We highlight in this
one-pager, their positioning in terms of volatility (beta), financial leverage (net
debt/equity) and medium-term funding requirements (3-yr capex/operating
cashflow).
On the three metrics, we believe the lowest-risk are Power Grid (PWGR IN,
Rs103, Neutral, TP Rs 100), Tata Power (TPWR IN, Rs1218, Outperform, TP:
Rs1553) and NTPC (NATP IN, Rs172, Outperform, TP: 248). The highest-risk
ones, in our view, are Lanco Infratech (LANCI IN, Rs 17.8, Unrated), Reliance
Power (RPWR IN, Rs98, Underperform, TP: Rs103) and CESC (CESC IN,
Rs322, Outperform, TP: Rs381).
Impact
Volatility – PWGR has the lowest beta vs LANCI the highest, relative to
the Nifty Index. In general, the utility universe is less volatile than the broader
market, due to its defensive earnings. Regulated utilities are, perhaps
obviously, the least volatile. While CESC is among the highest three, in our
view, volatility is increased due to it lower market-cap/less liquidity rather than
fundamentals.
Leverage – LANCI the highest geared, NTPC/RPWR strong cash
positions: Following the acquisition of Griffin and its generally highly
leveraged model, Lanco leads the sector in terms of financial risk, followed by
Adani Power (ADANI IN, Rs90, Neutral, TP: Rs106). NTPC and RPWR are
clearly the least leveraged, not due to funding structure, but rather their
sizable cash position (NTPC: US$4bn, RPWR: US$1.4bn cash/investments).
Funding requirements, LANCI/RPWR spending, JSW/TPWR earnings vs
capex: While much of the capital requirement in the next three years may be
debt-funded with funding in place, this metric does reflect an increasing
requirement for capital and greater pressure from rising lending costs relative
to operating cashflows. Tata Power and JSW Energy (JSW IN, Rs61.25,
Underperform, TP: Rs55) are clearly in the best position, with the former
generating strong operating cashflows and the latter having executed most of
its capex schedule in the near term.
Outlook
We retain our Underweight view on utilities driven by structural sectoral risks
in the medium term (1-2 years). In the shorter term, the defensive nature of
PWGR, NTPC and TPWR may aid their relative outperformance, in our view.
CESC is our preferred mid-cap play in the sector, while we’re still not willing to
buy the IPPs yet, with a challenging 2Q12 likely to play out, in our view
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Utilities: risk reminder
Beta and leverage snapshot
Event
Utilities are often seen as one of the most defensive GIC sectors and
therefore achieve plenty of attention in bearish markets. We highlight in this
one-pager, their positioning in terms of volatility (beta), financial leverage (net
debt/equity) and medium-term funding requirements (3-yr capex/operating
cashflow).
On the three metrics, we believe the lowest-risk are Power Grid (PWGR IN,
Rs103, Neutral, TP Rs 100), Tata Power (TPWR IN, Rs1218, Outperform, TP:
Rs1553) and NTPC (NATP IN, Rs172, Outperform, TP: 248). The highest-risk
ones, in our view, are Lanco Infratech (LANCI IN, Rs 17.8, Unrated), Reliance
Power (RPWR IN, Rs98, Underperform, TP: Rs103) and CESC (CESC IN,
Rs322, Outperform, TP: Rs381).
Impact
Volatility – PWGR has the lowest beta vs LANCI the highest, relative to
the Nifty Index. In general, the utility universe is less volatile than the broader
market, due to its defensive earnings. Regulated utilities are, perhaps
obviously, the least volatile. While CESC is among the highest three, in our
view, volatility is increased due to it lower market-cap/less liquidity rather than
fundamentals.
Leverage – LANCI the highest geared, NTPC/RPWR strong cash
positions: Following the acquisition of Griffin and its generally highly
leveraged model, Lanco leads the sector in terms of financial risk, followed by
Adani Power (ADANI IN, Rs90, Neutral, TP: Rs106). NTPC and RPWR are
clearly the least leveraged, not due to funding structure, but rather their
sizable cash position (NTPC: US$4bn, RPWR: US$1.4bn cash/investments).
Funding requirements, LANCI/RPWR spending, JSW/TPWR earnings vs
capex: While much of the capital requirement in the next three years may be
debt-funded with funding in place, this metric does reflect an increasing
requirement for capital and greater pressure from rising lending costs relative
to operating cashflows. Tata Power and JSW Energy (JSW IN, Rs61.25,
Underperform, TP: Rs55) are clearly in the best position, with the former
generating strong operating cashflows and the latter having executed most of
its capex schedule in the near term.
Outlook
We retain our Underweight view on utilities driven by structural sectoral risks
in the medium term (1-2 years). In the shorter term, the defensive nature of
PWGR, NTPC and TPWR may aid their relative outperformance, in our view.
CESC is our preferred mid-cap play in the sector, while we’re still not willing to
buy the IPPs yet, with a challenging 2Q12 likely to play out, in our view
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