Power Sector CERC FY11 short term report - pressure on bilateral n Emkay

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Power Sector

CERC FY11 short term report - pressure on bilateral

n     ST volumes at 10% (8.5% - FY10) of total in FY11 (Bilateral by traders at 34% of ST vs 41% in FY10). Incl. intra-state, ST volumes at 10%+ already reaching developed country benchmarks of 10-15%. Thus, incr. in volumes from here on to put more severe pressure on merchant prices

n     FY11 avg. tariffs per unit - bilateral Rs4.8 (Rs5.3), exchanges Rs3.5 (Rs5.0), UI at Rs3.9 (Rs4.6). Open access consumers bought power at avg. Rs2.7 - only when available cheap 

n     Past 3days of higher IEX prices of Rs3.7/unit (Jul11 Rs3/unit) unlikely to sustain as (1) potential volume incr., (2) reservoir levels of 35% vs 19% yoy, (3) continued weak demand

n     Playing contra might not deliver. Though negative consensus brought down valuations from excess to normal, earnings downgrade phase is pending with (1) Rs4 assumption in merchant, (2) best case operating parameters & (3) factored linkage fuel prices

n     Not comfortable on any IPP on absolute basis except Reliance power (captive coal play). Stick to regulated utilities - NHPC top pick (cheap ROE adj. valuations, regulatory trigger and commissioning pick up)