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Power utilities (Bharat Parekh)
Underweight
Key drivers of sector outlook
Our top-down model forecasts that pent-up demand (deficit of 8.5% on base
demand and 10.3% on peak load in FY11) and an expanding economy should
lead to +33% per capita consumption by FY12E (145% from FY12-17E).
However, lack of fuel & business case certainty, relatively expensive valuations
of large IPPs such as NTPC, increase in competition (regulated utilities) post the
closure of MoU window in Jan 2011 to win projects as India moves to a competitive
bidding regime and limited near-term growth catalysts create room for potential stock
weakness. Competition for new generation capacity could make returns volatile and
we believe that merchant power is a new ‘hype’ & potentially a ‘fad’.
We see substantial opportunities in the power sector with another 95GW (vs
planned 100GW) +94% during the 12th Plan (FY13-17E) of the 98GW of capacity
already ordered.
As demand is forecast at 8.5% CAGR during FY12-17E, and supply catches up,
we expect almost elimination of base shortage and <5% peak shortages by
FY17E. Rich valuations run the risk of deficits getting fixed earlier and that
creates risk to RoEs. This should put pressure on central/state governments to
review attractive returns for utilities @15.5% or 18.4% including tax gross-up.
We expect FY12/13 should be the years of big power tariff hikes as state discos
attempt to not only narrow losses but also repair balance sheets by regularizing
past dues (regulatory asset) on their path to sustainability (read).
Top Buy: JP Power
Top stock pick: JP Power
We recommend JP Power as our top Buy in the sector based on:
Scale-up genco. capacity to 6.4GW 3.3x by FY15E and 4.8x by FY20E to
transform it into 9.7GW (1.9GW) IPP with a sustainable business model.
Catalysts: 1) start of generation at 1.2GW Karcham Hydro in 1HFY12, 2) start of
Bina 500MW in 1HFY13, 3) shift of Karchana BTG order to Ph 2 of Bara & Bina
and 4) delay in start of construction at 1.5GW Lower Siang Hydro to 2013.
JP Power to be among top 5 private IPPs which offers a compelling and diversified
model: 1) fuel mix (hydro 40%: thermal 60%), 2) regulated vs. merchant mix
(50:50) and 3) location across north, central and north east India (54:25:21).
Pipeline of high RoE (20-30%) and well bid concession: 1) well bid concessions
– 82% of coal projects have domestic coal cost pass-through / captive coal, and
2) factor-in about 30-40% fall in merchant power tariffs by FY13.
Minority friendly restructuring – acquired 43% of Jaypee Karcham at 0.8x P/BV.
Risks: Near-term rich valuations due to back-loaded cash-flow, need equity
funding in FY14-15, rising exposure to volatile merchant power – key risk to EPS
and delivery of coal-linkages at Bina and Bara projects.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Power utilities (Bharat Parekh)
Underweight
Key drivers of sector outlook
Our top-down model forecasts that pent-up demand (deficit of 8.5% on base
demand and 10.3% on peak load in FY11) and an expanding economy should
lead to +33% per capita consumption by FY12E (145% from FY12-17E).
However, lack of fuel & business case certainty, relatively expensive valuations
of large IPPs such as NTPC, increase in competition (regulated utilities) post the
closure of MoU window in Jan 2011 to win projects as India moves to a competitive
bidding regime and limited near-term growth catalysts create room for potential stock
weakness. Competition for new generation capacity could make returns volatile and
we believe that merchant power is a new ‘hype’ & potentially a ‘fad’.
We see substantial opportunities in the power sector with another 95GW (vs
planned 100GW) +94% during the 12th Plan (FY13-17E) of the 98GW of capacity
already ordered.
As demand is forecast at 8.5% CAGR during FY12-17E, and supply catches up,
we expect almost elimination of base shortage and <5% peak shortages by
FY17E. Rich valuations run the risk of deficits getting fixed earlier and that
creates risk to RoEs. This should put pressure on central/state governments to
review attractive returns for utilities @15.5% or 18.4% including tax gross-up.
We expect FY12/13 should be the years of big power tariff hikes as state discos
attempt to not only narrow losses but also repair balance sheets by regularizing
past dues (regulatory asset) on their path to sustainability (read).
Top Buy: JP Power
Top stock pick: JP Power
We recommend JP Power as our top Buy in the sector based on:
Scale-up genco. capacity to 6.4GW 3.3x by FY15E and 4.8x by FY20E to
transform it into 9.7GW (1.9GW) IPP with a sustainable business model.
Catalysts: 1) start of generation at 1.2GW Karcham Hydro in 1HFY12, 2) start of
Bina 500MW in 1HFY13, 3) shift of Karchana BTG order to Ph 2 of Bara & Bina
and 4) delay in start of construction at 1.5GW Lower Siang Hydro to 2013.
JP Power to be among top 5 private IPPs which offers a compelling and diversified
model: 1) fuel mix (hydro 40%: thermal 60%), 2) regulated vs. merchant mix
(50:50) and 3) location across north, central and north east India (54:25:21).
Pipeline of high RoE (20-30%) and well bid concession: 1) well bid concessions
– 82% of coal projects have domestic coal cost pass-through / captive coal, and
2) factor-in about 30-40% fall in merchant power tariffs by FY13.
Minority friendly restructuring – acquired 43% of Jaypee Karcham at 0.8x P/BV.
Risks: Near-term rich valuations due to back-loaded cash-flow, need equity
funding in FY14-15, rising exposure to volatile merchant power – key risk to EPS
and delivery of coal-linkages at Bina and Bara projects.
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