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UBS Investment Research
India Power Utilities
M erchant tariffs remain subdued
Event: spot tariffs remain below Rs3/unit in 2Q FY12
According to the data from Indian Energy Exchange, the spot/merchant tariffs
remain subdued i.e. Rs2.99/unit for July/August and Rs2.55/unit in September.
Overall, 2Q FY12 average spot tariff is 6% below 1Q FY12 and on a YoY basis,
1H FY12 average spot tariffs have declined 30%. This data indicates that state
distribution companies (or SEBs) are less willing to pay high prices for power
procurement.
Impact: short-term market is ~12% of India’s total electricity purchase
We think the decline in prices in the short-term market (spot tariffs indicate the
general pricing trend in this market) is a positive development towards reduction in
SEB losses. If we compare FY09 spot tariffs to tariffs in FY12, we see a ~60%
decline in three years. This is equivalent to Rs125bn-150bn of savings for the
power purchasers; definitely helpful in mitigating the SEB losses. Please refer to
our report, India Power Utilities: Not all doom and gloom, published on 25 August
2011.
Action: sector underperformance provides buying opportunity
Share prices of power utilities under our coverage have on average corrected 40%
YTD and we think there are attractive buying opportunities emerging in the sector.
We prefer companies with low risk (Power Grid and NTPC) or those with
compelling valuations (Lanco and Reliance Infrastructure). Investors who are
bearish on SEB losses may prefer Power Grid, NTPC, and Reliance Infrastructure.
Our top picks: Power Grid and Lanco
We prefer Power Grid and Lanco. We also have Buy ratings on NTPC, Tata
Power, and Reliance Infra. We recently upgraded Reliance Power from Sell to Buy
rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Power Utilities
M erchant tariffs remain subdued
Event: spot tariffs remain below Rs3/unit in 2Q FY12
According to the data from Indian Energy Exchange, the spot/merchant tariffs
remain subdued i.e. Rs2.99/unit for July/August and Rs2.55/unit in September.
Overall, 2Q FY12 average spot tariff is 6% below 1Q FY12 and on a YoY basis,
1H FY12 average spot tariffs have declined 30%. This data indicates that state
distribution companies (or SEBs) are less willing to pay high prices for power
procurement.
Impact: short-term market is ~12% of India’s total electricity purchase
We think the decline in prices in the short-term market (spot tariffs indicate the
general pricing trend in this market) is a positive development towards reduction in
SEB losses. If we compare FY09 spot tariffs to tariffs in FY12, we see a ~60%
decline in three years. This is equivalent to Rs125bn-150bn of savings for the
power purchasers; definitely helpful in mitigating the SEB losses. Please refer to
our report, India Power Utilities: Not all doom and gloom, published on 25 August
2011.
Action: sector underperformance provides buying opportunity
Share prices of power utilities under our coverage have on average corrected 40%
YTD and we think there are attractive buying opportunities emerging in the sector.
We prefer companies with low risk (Power Grid and NTPC) or those with
compelling valuations (Lanco and Reliance Infrastructure). Investors who are
bearish on SEB losses may prefer Power Grid, NTPC, and Reliance Infrastructure.
Our top picks: Power Grid and Lanco
We prefer Power Grid and Lanco. We also have Buy ratings on NTPC, Tata
Power, and Reliance Infra. We recently upgraded Reliance Power from Sell to Buy
rating.
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