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The recently concluded State Power Ministers' conference, which agreed to implement wellknown
reforms, inspires confidence. However, given the political compulsion and macro risks
in implementing the reforms, we lower our target price to Rs255. Our earnings estimates
remain largely unchanged.
1QFY12: spreads under pressure, expected to improve
In 1QFY12, net profit adjusted for foreign exchange gains/losses and one-off items grew by
14% yoy to Rs 7.16bn (see Table 1). Reported spreads fell by 37bp yoy to 2.28%. Going
forward, management expects spreads to improve due to asset repricing. In terms of asset
quality, a wind-power project was classified as a non-performing loan (NPL) due to a delay in
commissioning in 4QFY11 (about Rs2bn), but has been performing satisfactorily. Further, a
hydro project under implementation (Rs7bn outstanding), which was also delayed, has
received environmental clearance and will likely be on track.
Highlights of State Power Ministers' conference
The conference agreed to implement measures to address well-known issues such as: 1)
timely filing and revision of tariffs; 2) timely preparation of state financial statements; 3)
automatic pass-through to tariffs of any increase in fuel costs; 4) advance payment of
subsidies by state governments and payment of all outstanding subsidies as soon as
possible; 5) reduction in transmission and distribution (T&D) losses to 15% (timeline to differ
between states); 6) appointment of distribution franchises in urban areas; and 7) state
governments to consider converting loans from them to the distribution utilities as state
government equity, to ensure capital infusion and improvement in net worth of the utility.
Challenge is to implement the above
We do not believe the central government will chose to bail out the state utilities, which in our
view is a positive. That said, we believe it will be a challenge for state governments or
government entities to fully implement the above measures given their own political or other
compulsions.
Valuations are attractive, we stay at Buy
We have marginally tweaked our earnings estimates. However, given the macro risks we have
lowered our terminal ROE assumption to 18% (from 19%), resulting in a reduction in our target
price to Rs255. We maintain our Buy rating as valuations remain attractive.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The recently concluded State Power Ministers' conference, which agreed to implement wellknown
reforms, inspires confidence. However, given the political compulsion and macro risks
in implementing the reforms, we lower our target price to Rs255. Our earnings estimates
remain largely unchanged.
1QFY12: spreads under pressure, expected to improve
In 1QFY12, net profit adjusted for foreign exchange gains/losses and one-off items grew by
14% yoy to Rs 7.16bn (see Table 1). Reported spreads fell by 37bp yoy to 2.28%. Going
forward, management expects spreads to improve due to asset repricing. In terms of asset
quality, a wind-power project was classified as a non-performing loan (NPL) due to a delay in
commissioning in 4QFY11 (about Rs2bn), but has been performing satisfactorily. Further, a
hydro project under implementation (Rs7bn outstanding), which was also delayed, has
received environmental clearance and will likely be on track.
Highlights of State Power Ministers' conference
The conference agreed to implement measures to address well-known issues such as: 1)
timely filing and revision of tariffs; 2) timely preparation of state financial statements; 3)
automatic pass-through to tariffs of any increase in fuel costs; 4) advance payment of
subsidies by state governments and payment of all outstanding subsidies as soon as
possible; 5) reduction in transmission and distribution (T&D) losses to 15% (timeline to differ
between states); 6) appointment of distribution franchises in urban areas; and 7) state
governments to consider converting loans from them to the distribution utilities as state
government equity, to ensure capital infusion and improvement in net worth of the utility.
Challenge is to implement the above
We do not believe the central government will chose to bail out the state utilities, which in our
view is a positive. That said, we believe it will be a challenge for state governments or
government entities to fully implement the above measures given their own political or other
compulsions.
Valuations are attractive, we stay at Buy
We have marginally tweaked our earnings estimates. However, given the macro risks we have
lowered our terminal ROE assumption to 18% (from 19%), resulting in a reduction in our target
price to Rs255. We maintain our Buy rating as valuations remain attractive.
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