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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Power Utilities
More positive newsflow on tariff hikes
„ Event: Delhi hiked electricity tariffs by 22% last week
Last week, the Delhi Government raised electricity tariffs by 22% (more than our
expectation of 20%). The state electricity regulator in Punjab has also proposed a
7-12% tariff hike across categories in its revised tariff guidelines for FY12. News
reports indicate that Rajasthan and Tamil Nadu may also raise tariffs (our channel
checks suggest tariff hike of 12-14%) in the next few months.
„ Impact: tariff hikes help in cutting losses; positive for SEBs
We think the states will seek to avoid extended power cuts, as sustained power cuts
could lead to a backlash during the elections. In addition, as they are unlikely to
receive help from the central government, the states are making progress in
lowering their SEB losses. We believe that the states have raised tariffs and there is
a positive momentum on tariff hikes. Please refer to our detailed sector report
‘India Power Utilities: Not all doom and gloom’ dated 25 August 2011.
„ Action: sector underperformance provides buying opportunity
Share prices of India power utilities under our coverage have corrected 37% YTD
and we think attractive buying opportunities are 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 tariff
hikes 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.
Power tariffs need to rise
We think SEBs have been trying to lower their losses. We believe the tariffs can
be adequately raised to cover costs and lower losses as this is more a question of
political will from the state governments. We also believe that the electorate
understands that tariff hikes are a reality. For instance, over the past ten years,
prices of all the other basic and essential commodities such as salt, wheat, rice,
pulses and kerosene have increased more rapidly than electricity.
During the tariff hikes over the past six to 12 months, resistance from the
opposition political parties has been manageable for the local governments.
Another key factor supporting tariff hikes is that among the state governments,
there was hope that the central government would help the SEBs if things do not
improve. The Power Ministry and the Planning Commission have informed the
states in clear terms that this is now highly unlikely.
States are raising tariffs
According to news reports and our analysis of newsflow, many state
governments have moved forward on power tariff hikes. Of the 28 states in India,
at least 16 states (more than 80% of total consumption) have either implemented
or proposed power tariff hikes over the past six months. The key states where
tariffs have been revised or will be revised are: Karnataka (22%), Delhi (22%),
Rajasthan (20%), Orissa (20%), Bihar (19%), Jharkhand (16%), Assam (14%),
and Chhattisgarh (14%).
Table 1: Tariff hikes across states
State Tariff hike
Karnataka 22%
Delhi 22%
Rajasthan 20%
Orissa 20%
Bihar 19%
Jharkhand 16%
Assam 14%
Chhattisgarh 14%
Andhra Pradesh 12%
Punjab 9%
West Bengal 9%
Gujarat 8%
Madhya Pradesh 6%
Uttarakhand 5%
Maharashtra 5%
Haryana 3%
Source: UBS estimates
Q Statement of Risk
In the Indian power sector, the key risks for companies are regulatory, execution
related, funding availability and interest rates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Power Utilities
More positive newsflow on tariff hikes
„ Event: Delhi hiked electricity tariffs by 22% last week
Last week, the Delhi Government raised electricity tariffs by 22% (more than our
expectation of 20%). The state electricity regulator in Punjab has also proposed a
7-12% tariff hike across categories in its revised tariff guidelines for FY12. News
reports indicate that Rajasthan and Tamil Nadu may also raise tariffs (our channel
checks suggest tariff hike of 12-14%) in the next few months.
„ Impact: tariff hikes help in cutting losses; positive for SEBs
We think the states will seek to avoid extended power cuts, as sustained power cuts
could lead to a backlash during the elections. In addition, as they are unlikely to
receive help from the central government, the states are making progress in
lowering their SEB losses. We believe that the states have raised tariffs and there is
a positive momentum on tariff hikes. Please refer to our detailed sector report
‘India Power Utilities: Not all doom and gloom’ dated 25 August 2011.
„ Action: sector underperformance provides buying opportunity
Share prices of India power utilities under our coverage have corrected 37% YTD
and we think attractive buying opportunities are 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 tariff
hikes 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.
Power tariffs need to rise
We think SEBs have been trying to lower their losses. We believe the tariffs can
be adequately raised to cover costs and lower losses as this is more a question of
political will from the state governments. We also believe that the electorate
understands that tariff hikes are a reality. For instance, over the past ten years,
prices of all the other basic and essential commodities such as salt, wheat, rice,
pulses and kerosene have increased more rapidly than electricity.
During the tariff hikes over the past six to 12 months, resistance from the
opposition political parties has been manageable for the local governments.
Another key factor supporting tariff hikes is that among the state governments,
there was hope that the central government would help the SEBs if things do not
improve. The Power Ministry and the Planning Commission have informed the
states in clear terms that this is now highly unlikely.
States are raising tariffs
According to news reports and our analysis of newsflow, many state
governments have moved forward on power tariff hikes. Of the 28 states in India,
at least 16 states (more than 80% of total consumption) have either implemented
or proposed power tariff hikes over the past six months. The key states where
tariffs have been revised or will be revised are: Karnataka (22%), Delhi (22%),
Rajasthan (20%), Orissa (20%), Bihar (19%), Jharkhand (16%), Assam (14%),
and Chhattisgarh (14%).
Table 1: Tariff hikes across states
State Tariff hike
Karnataka 22%
Delhi 22%
Rajasthan 20%
Orissa 20%
Bihar 19%
Jharkhand 16%
Assam 14%
Chhattisgarh 14%
Andhra Pradesh 12%
Punjab 9%
West Bengal 9%
Gujarat 8%
Madhya Pradesh 6%
Uttarakhand 5%
Maharashtra 5%
Haryana 3%
Source: UBS estimates
Q Statement of Risk
In the Indian power sector, the key risks for companies are regulatory, execution
related, funding availability and interest rates.
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