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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
No quick fixes
Our recent meetings with Ministry of Power, CERC, Planning Commission,
PFC, NTPC, Powergrid and NHPC reconfirmed that there are no quick fixes
to India’s power crisis. Government and RBI have taken some
commendable steps to reduce bank debt availability to SEBs which should
force more tariff hikes. However, coal shortage is a much trickier issue.
Strong policy action is needed, though there are no signs of it yet. Some
of the weaker players that have bid aggressively could be casualties with
impact on financial sector as well. We are cutting our earnings and recos
to reflect these issues. Power Grid remains the safest play in the sector
followed by NTPC and Tata Power. Avoid all others.
RBI restricts lending to SEBs; should force states to hike tariffs
q Historically, SEBs have been funding their operations by taking ever-higher loans
from banks. RBI has reportedly put an end to this ever-greening of loans.
q Going forward SEB losses will also be included in fiscal deficits of various states.
q We understand that Central government is also unlikely to provide any financial
support to either SEBs or state governments for this.
q All these measures should force majority of states to take tariff hikes despite
inflation worries. We are less concerned about SEB losses and more about fuel.
Fuel situation remains grim; growth will take a breather
q No quick fixes are expected for increasing the domestic coal and gas production.
q Banks and Power NBFC’s are increasingly becoming cautious while sanctioning and
disbursing loans to the new power projects.
q With little clarity on future availability of fuel some of the developers have put their
expansion plans on hold for now.
q Some projects where developers have bid aggressively on tariff front with little or
no cost pass through may need debt restructuring. This will have an impact on the
country’s banks and financial institutions as well.
Policy actions needed to put the sector back on track
q Meaningful and regular tariff hikes are needed from SEBs. Well it is easier said than
done but there has been a glimmer of hope in last year or so.
q Coal sector should eventually be opened up to the private sector for mining and not
only for captive consumption. Price pooling of coal and gas are some of the options
on which the government need to take a call soon.
Cutting earnings and recos for our coverage universe
q We have cut NTPC and Powergrid earnings by 1-5% over FY12-13 to factor in
delays in capacity addition and lower incentives.
q Tata Power’s earnings cut by 8-13% to factor in higher tax rate and lower coal
production at Bumi. Adani Power’s EPS cut by 19% on lower utilisation of Tiroda.
q JSW Energy earnings cut by 19-57% to factor in lower utilisation for merchant
capacity and delays in the Barmer project. Lanco’s earnings have been cut by 58-
85% primarily due to elimination of EPC profits on consolidation.
q Rec changes - NTPC and Tata Power from BUY to O-PF, Adani and Lanco from O-PF
to U-PF. JSW from U-PF to SELL. Maintain O-PF on PowerGrid and U-PF on NHPC.
Private IPPs are down sharply but no time for bottom fishing
q Private IPPs are down by 30- 75% YTD on concerns of fuel and merchant tariffs.
q With no near term solutions especially on fuel in sight, the next couple of years will
be very challenging in terms of earnings for most companies.
q Regulated utilities - Powergrid, NTPC and NHPC - have an earnings protection and
have outperformed.
q Even after all the disappointments in their expansion plans these companies would
still report a growth in profits over next few years which surely cannot be said for
most of the IPPs. The weaker ones may even report losses.
q We believe there will be better entry points over the next six months or so.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
No quick fixes
Our recent meetings with Ministry of Power, CERC, Planning Commission,
PFC, NTPC, Powergrid and NHPC reconfirmed that there are no quick fixes
to India’s power crisis. Government and RBI have taken some
commendable steps to reduce bank debt availability to SEBs which should
force more tariff hikes. However, coal shortage is a much trickier issue.
Strong policy action is needed, though there are no signs of it yet. Some
of the weaker players that have bid aggressively could be casualties with
impact on financial sector as well. We are cutting our earnings and recos
to reflect these issues. Power Grid remains the safest play in the sector
followed by NTPC and Tata Power. Avoid all others.
RBI restricts lending to SEBs; should force states to hike tariffs
q Historically, SEBs have been funding their operations by taking ever-higher loans
from banks. RBI has reportedly put an end to this ever-greening of loans.
q Going forward SEB losses will also be included in fiscal deficits of various states.
q We understand that Central government is also unlikely to provide any financial
support to either SEBs or state governments for this.
q All these measures should force majority of states to take tariff hikes despite
inflation worries. We are less concerned about SEB losses and more about fuel.
Fuel situation remains grim; growth will take a breather
q No quick fixes are expected for increasing the domestic coal and gas production.
q Banks and Power NBFC’s are increasingly becoming cautious while sanctioning and
disbursing loans to the new power projects.
q With little clarity on future availability of fuel some of the developers have put their
expansion plans on hold for now.
q Some projects where developers have bid aggressively on tariff front with little or
no cost pass through may need debt restructuring. This will have an impact on the
country’s banks and financial institutions as well.
Policy actions needed to put the sector back on track
q Meaningful and regular tariff hikes are needed from SEBs. Well it is easier said than
done but there has been a glimmer of hope in last year or so.
q Coal sector should eventually be opened up to the private sector for mining and not
only for captive consumption. Price pooling of coal and gas are some of the options
on which the government need to take a call soon.
Cutting earnings and recos for our coverage universe
q We have cut NTPC and Powergrid earnings by 1-5% over FY12-13 to factor in
delays in capacity addition and lower incentives.
q Tata Power’s earnings cut by 8-13% to factor in higher tax rate and lower coal
production at Bumi. Adani Power’s EPS cut by 19% on lower utilisation of Tiroda.
q JSW Energy earnings cut by 19-57% to factor in lower utilisation for merchant
capacity and delays in the Barmer project. Lanco’s earnings have been cut by 58-
85% primarily due to elimination of EPC profits on consolidation.
q Rec changes - NTPC and Tata Power from BUY to O-PF, Adani and Lanco from O-PF
to U-PF. JSW from U-PF to SELL. Maintain O-PF on PowerGrid and U-PF on NHPC.
Private IPPs are down sharply but no time for bottom fishing
q Private IPPs are down by 30- 75% YTD on concerns of fuel and merchant tariffs.
q With no near term solutions especially on fuel in sight, the next couple of years will
be very challenging in terms of earnings for most companies.
q Regulated utilities - Powergrid, NTPC and NHPC - have an earnings protection and
have outperformed.
q Even after all the disappointments in their expansion plans these companies would
still report a growth in profits over next few years which surely cannot be said for
most of the IPPs. The weaker ones may even report losses.
q We believe there will be better entry points over the next six months or so.
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