Know Your Power-- Festival of (expensive) lights? ::JP Morgan

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 Merchant rates picking up in October: Absolute price levels for
short term bilateral contracts struck for Oct were at Rs3.76 vs. Rs3.64
for Sep and an average Rs3.8/unit in 2QFY12. JSPL in its 2QFY12
conference call highlighted that October rates have spiked up due to
(1) the Telangana issue (2) heavy rains in the East impacting coal
production (3) festive season demand and (4) a very warm month
given the end of the monsoons, and should decline by Nov - stabilizing
at Rs4.
 Deficit trend catches up with power demand growth in Sept: In the
past few months, while power demand has picked up, the deficit trend
had been declining. However in the very warm month of Sep, power
demand picked up significantly (peak demand +12.1% yoy, energy
demand +9.9% yoy) and the deficit widened sharply mom as well,
underpinned by severe coal shortages in certain pockets. Peak deficit
shot up to 13.9% as high as ’07-‘08 months, compared to 8.6% in Aug
and 8.9% in Sept ’10. After several months of sequential declines,
energy deficit too increased, by 180bps mom to 6.6% (up 70bps yoy).
 Expensive power could see some takers: Expensive power producers
(gas and imported coal) have seen low PLFs in the past six months
with SEBs backing down. However given that various Chief Ministers
of States have assured uninterrupted power supply during the festive
month we could see a pick up in offtake for these plants as production
at linkage coal based plants dwindles because of fuel shortages.
 IPPs continue to underperform. Adani (potential increase in
Indonesian coal costs), Lanco (Perdaman case overhang, high leverage)
and JSW (high coal cost, delayed execution) underperformed the
market. The defensives NTPC (low PLF) and TPWR (power cut in
Mumbai) gave up their gains, while PWGR (pick up in capitalization)
outperformed. JPVL and RPWR, which had corrected sharply,
outperformed too. We recommend staying OW on TPWR (coal
exposure, negatives on Mundra built in) and PWGR (execution picking
up, limited risks to earnings). We’d continue to avoid other IPPs.