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India Equity Research Reports, IPO and Stock News
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The Indian power sector has to reinvent itself to face the 'new normal' of domestic fuel shortages
and high energy prices. Policy makers have initiated work to find structural solutions to pressing
issues, but implementation could take a while, impacting investments and creating a negative
feedback loop.
India’s overall PLF for coal linkage capacity could fall to 61-66% in FY17F
The Indian coal problem seems insurmountable. Theoretically, domestic coal shortages could be
addressed by coal imports, coal price pooling and rationalisation of presently inefficient domestic
linkages. However, persistent key bottlenecks make one wary of being constructive on easy
solutions, such as equipment design (coal blending), infrastructure (capacity of ports and railways
to handle large imported coal quantities) and recurrence of higher distribution losses (with higher
cost of imported coal). Our analysis shows that due to the boiler blending limitation, India’s overall
plant load factor (PLF) for coal linkage-based capacity could fall to 61-66% in FY17 from 75%
currently. Also, the award of fresh linkages under the XIIth plan dispensation is highly unlikely, at
least in the near term, which could impact several projects already under construction.
Infrastructure: slowdown led by internal factors; we expect recovery to be slow
The current slowdown in the investment cycle is led by both cyclical (high interest rates) and
structural issues (fuel shortages, environment clearances and corruption). Hence, we expect the
recovery (led by internal factors) to be slower than the 2008-09 cycle (led by external factors).
India’s power equipment manufacturers could see a sharp slowdown in orders due to fuel deficits,
rising domestic competition and lack of policy support (import duty) from the Indian government.
We project BTG orders at 15-20GW pa (best case) for the next three years vs 30-35GW pa in
FY08-11, thereby impacting the fortunes of BHEL and L&T.
Power utilities: Buy PowerGrid, NHPC; Hold NTPC, Tata Power, Adani, JSW
Policy makers have initiated work to find structural solutions to pressing issues, but
implementation could take a while, impacting investments and creating a negative feedback loop.
We prefer relatively insulated companies such as Powergrid (transmission play) and NHPC
(hydro play); Hold thermal plays until there is macro/micro clarity on key issues.
Industrials: Buy L&T, Crompton Greaves; Hold: BHEL; Sell: ABB, Areva, Siemens
We recommend Buying Crompton and L&T given valuation comfort and as multi-segment/multicountry
plays partly negate slowdowns in one segment or country by an uptick in another. We
would Sell ABB, Areva and Siemens on valuation and/or further potential headwinds. BHEL’s
absolute downside might be limited, but we see no outperformance until business prospects
improve and/or it diversifies into areas to counter the slowdown in power.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The Indian power sector has to reinvent itself to face the 'new normal' of domestic fuel shortages
and high energy prices. Policy makers have initiated work to find structural solutions to pressing
issues, but implementation could take a while, impacting investments and creating a negative
feedback loop.
India’s overall PLF for coal linkage capacity could fall to 61-66% in FY17F
The Indian coal problem seems insurmountable. Theoretically, domestic coal shortages could be
addressed by coal imports, coal price pooling and rationalisation of presently inefficient domestic
linkages. However, persistent key bottlenecks make one wary of being constructive on easy
solutions, such as equipment design (coal blending), infrastructure (capacity of ports and railways
to handle large imported coal quantities) and recurrence of higher distribution losses (with higher
cost of imported coal). Our analysis shows that due to the boiler blending limitation, India’s overall
plant load factor (PLF) for coal linkage-based capacity could fall to 61-66% in FY17 from 75%
currently. Also, the award of fresh linkages under the XIIth plan dispensation is highly unlikely, at
least in the near term, which could impact several projects already under construction.
Infrastructure: slowdown led by internal factors; we expect recovery to be slow
The current slowdown in the investment cycle is led by both cyclical (high interest rates) and
structural issues (fuel shortages, environment clearances and corruption). Hence, we expect the
recovery (led by internal factors) to be slower than the 2008-09 cycle (led by external factors).
India’s power equipment manufacturers could see a sharp slowdown in orders due to fuel deficits,
rising domestic competition and lack of policy support (import duty) from the Indian government.
We project BTG orders at 15-20GW pa (best case) for the next three years vs 30-35GW pa in
FY08-11, thereby impacting the fortunes of BHEL and L&T.
Power utilities: Buy PowerGrid, NHPC; Hold NTPC, Tata Power, Adani, JSW
Policy makers have initiated work to find structural solutions to pressing issues, but
implementation could take a while, impacting investments and creating a negative feedback loop.
We prefer relatively insulated companies such as Powergrid (transmission play) and NHPC
(hydro play); Hold thermal plays until there is macro/micro clarity on key issues.
Industrials: Buy L&T, Crompton Greaves; Hold: BHEL; Sell: ABB, Areva, Siemens
We recommend Buying Crompton and L&T given valuation comfort and as multi-segment/multicountry
plays partly negate slowdowns in one segment or country by an uptick in another. We
would Sell ABB, Areva and Siemens on valuation and/or further potential headwinds. BHEL’s
absolute downside might be limited, but we see no outperformance until business prospects
improve and/or it diversifies into areas to counter the slowdown in power.
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