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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Light at the end of the tunnel
POWF and RECL are best placed to leverage on the massive investment
opportunity: Over the next five years, c.$236bn is estimated to be invested in
the power sector as India scales-up infrastructure in generation, transmission
and distribution. REC and POWF are best positioned to leverage on the
massive investment opportunity given a) IFC status which gives exposure
limits advantage, easier access to ECBs. IFCs have a competitive edge over
banks given better asset-liability profile. Further, most banks are approaching
their sectoral limits for infrastructure sector which should reduce competitive
intensity for specialised power financiers like POWF and RECL.
SEB default unlikely – losses may have peaked, tariff hike trend
encouraging: SEBs have been under financial distress due to non-revision of
tariffs, non-payment of subsidies and high merchant power rates. However,
recent measures offer hope that their finances will improve going ahead led
by a) 5-40% tariff hike across states over the last 18 months (Exhibit 2).
Further, 3 of the 4 states (TN, UP, MP, Rajasthan) that account for c.70% of
cash losses have already raised/proposed to raise tariff while UP will raise
tariff post election early next year. b) APTEL facilitating suo-motu tariff
increase by the regulator. c) Increasing pressure from lenders to improve
finances by raising tariffs/improving efficiency. d) Declining power purchase
costs which would provide much needed relief to SEBs. These measures are a
step in the right direction and we believe financial position of SEBs will
improve going forward, implying that default from SEBs for POWF and RECL is
unlikely.
Fuel availability - A key risk: Coal and gas availability, in our view, is a
significant threat which could restrict power supplies and impact financial
viability of projects. Coal supply has been severely hampered due to a) Coal
India unable to achieve sufficient production growth, b) delayed
environmental clearances, c) infrastructure bottlenecks, d) blending limitation
in existing plants, e) pricing issues on imported coal from Indonesia and
Australia. However, recent steps by government to scrap go and no-go policy
and granting environment clearances to some delayed projects should reduce
this concern over the medium term (3 years); though fuel availability remains
a key near-term risk which could lead to restructuring of projects (especially
IPPs in the capacity range of 50Mw-100mW) and result in some NPV loss for
power financiers.
Initiate coverage on POWF and RECL – BUY with TP of `205 and `220
respectively - recent SEB/government measures and decline in wholesale rates
should act as key catalysts: POWF and RECL have de-rated significantly over
the past 12 months due to concerns over financial health of SEBs (POWF
currently trades at 0.95x 1yr fwd book, down from a peak of 2.9x; while RECL
at 1.1x 1yr fwd book, down from a peak of 2.9x. Going ahead, we believe
recent SEB/government measures and decline in wholesale borrowing rates
from 1QFY13 (which will impact spreads positively) should act as key
catalysts for stock outperformance. We initiate coverage on POWF with Mar’13
TP of `205 – current valuations are attractive at 0.9x FY13E book with
dividend yield of c.5% (based on FY13E dividend). We value the stock at 1x
FY14P/B (at 1.05x Mar’14 ABV - adjusted for bad and doubtful debt reserves)
Initiate coverage on RECL with Mar’13 TP of `220 - current valuations are
attractive at 1x FY13E book with dividend yield of c.5% (based on FY13E
dividend). We value the stock at 1.1x FY14P/B (at 1.15x Mar’14 ABV -
adjusted for bad and doubtful debt reserves).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Light at the end of the tunnel
POWF and RECL are best placed to leverage on the massive investment
opportunity: Over the next five years, c.$236bn is estimated to be invested in
the power sector as India scales-up infrastructure in generation, transmission
and distribution. REC and POWF are best positioned to leverage on the
massive investment opportunity given a) IFC status which gives exposure
limits advantage, easier access to ECBs. IFCs have a competitive edge over
banks given better asset-liability profile. Further, most banks are approaching
their sectoral limits for infrastructure sector which should reduce competitive
intensity for specialised power financiers like POWF and RECL.
SEB default unlikely – losses may have peaked, tariff hike trend
encouraging: SEBs have been under financial distress due to non-revision of
tariffs, non-payment of subsidies and high merchant power rates. However,
recent measures offer hope that their finances will improve going ahead led
by a) 5-40% tariff hike across states over the last 18 months (Exhibit 2).
Further, 3 of the 4 states (TN, UP, MP, Rajasthan) that account for c.70% of
cash losses have already raised/proposed to raise tariff while UP will raise
tariff post election early next year. b) APTEL facilitating suo-motu tariff
increase by the regulator. c) Increasing pressure from lenders to improve
finances by raising tariffs/improving efficiency. d) Declining power purchase
costs which would provide much needed relief to SEBs. These measures are a
step in the right direction and we believe financial position of SEBs will
improve going forward, implying that default from SEBs for POWF and RECL is
unlikely.
Fuel availability - A key risk: Coal and gas availability, in our view, is a
significant threat which could restrict power supplies and impact financial
viability of projects. Coal supply has been severely hampered due to a) Coal
India unable to achieve sufficient production growth, b) delayed
environmental clearances, c) infrastructure bottlenecks, d) blending limitation
in existing plants, e) pricing issues on imported coal from Indonesia and
Australia. However, recent steps by government to scrap go and no-go policy
and granting environment clearances to some delayed projects should reduce
this concern over the medium term (3 years); though fuel availability remains
a key near-term risk which could lead to restructuring of projects (especially
IPPs in the capacity range of 50Mw-100mW) and result in some NPV loss for
power financiers.
Initiate coverage on POWF and RECL – BUY with TP of `205 and `220
respectively - recent SEB/government measures and decline in wholesale rates
should act as key catalysts: POWF and RECL have de-rated significantly over
the past 12 months due to concerns over financial health of SEBs (POWF
currently trades at 0.95x 1yr fwd book, down from a peak of 2.9x; while RECL
at 1.1x 1yr fwd book, down from a peak of 2.9x. Going ahead, we believe
recent SEB/government measures and decline in wholesale borrowing rates
from 1QFY13 (which will impact spreads positively) should act as key
catalysts for stock outperformance. We initiate coverage on POWF with Mar’13
TP of `205 – current valuations are attractive at 0.9x FY13E book with
dividend yield of c.5% (based on FY13E dividend). We value the stock at 1x
FY14P/B (at 1.05x Mar’14 ABV - adjusted for bad and doubtful debt reserves)
Initiate coverage on RECL with Mar’13 TP of `220 - current valuations are
attractive at 1x FY13E book with dividend yield of c.5% (based on FY13E
dividend). We value the stock at 1.1x FY14P/B (at 1.15x Mar’14 ABV -
adjusted for bad and doubtful debt reserves).
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