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Utilities
India
Respite in the near term though structural issues remain. The utilities sector may
see some respite in the near term with (1) improving utilization rates, (2) softening
prices of imported coal, although partially offset by a depreciating currency, and
(3) improved rates in the spot market. While the positives may give some earning
respite in the near term, the absence of remedial action to solve the impending coal
deficit prevents us from taking a constructive view on the sector.
PLFs and short-term rates showing some improvement
Average exchange tariffs (IEX) have improved significantly through December, aided by improved
demand (15% yoy) leading to an increase in energy deficit—above 10% for the first time since
June 2010 (see Exhibit 1).
All-India thermal PLF increased by 240 bps yoy in November 2011 with some large merchant
capacities improving PLFs meaningfully (see Exhibit 2). We note that increased demand could likely
be attributed to the recent round of tariff hikes carried out by various state distribution utilities and
a corresponding boost in purchasing power and credit respite.
Softening in global coal prices, partially offset by depreciating currency
Global coal prices have corrected by ~20% from their peak levels of US$130/ton (see Exhibit 6),
though benefits of falling coal prices will be partially offset by 18% depreciation in the currency
during the same period. In light of the apparent global slowdown, we do not rule out further
correction in coal prices though note that benefits for imported coal-based plants will be muted
owing to a weaker Rupee (KIE’s Economic Research team estimates further depreciation bias in the
currency).
Fuel woes still loom large, preventing us to take a constructive view
Despite the improvement in PLFs and merchant tariffs, we are unable to take a constructive view
on the sector as we do not see any near-term resolution of the country’s fuel woes—(1) domestic
coal production continues to lag requirement, and (2) output from Reliance’s KG D6 continues to
drop, posing serious threat to the viability of both extant and future gas-based capacities.
Although we are encouraged by the tariff revisions and urgency shown by policymakers to address
the problem of deteriorating financials of SEBs, we still believe that PLFs (and hence the
profitability) of high-cost producers of power will continue to be under threat.
Positive on resource owners, low-cost generators
We maintain our cautious stance on the sector and recommend aligning with utilities with
(1) access to fuel or resource ownership, (2) integrated operations, and (3) low-cost generation
that better combat the current fuel deficit and questionable financial health of state electricity
boards. NHPC, Tata Power and CESC in our coverage universe are better-positioned to cope with
the current situation in the power sector. We recommend avoiding private-sector generators that
have (1) high dependence on merchant sales, and/or (2) dependence on linked coal or spot
purchases of coal (imported or e-auction).
Revise earnings to account for depreciating currency and commissioning delays
We have revised our earnings estimates and target prices for JSW Energy, Adani Power, Reliance
Power and NTPC to adjust for currency depreciation and/or commissioning delays
Revise estimates and target prices to align with currency depreciation and delay
in commissioning
We have revised our estimates and target prices to adjust for currency depreciation and/or
delay in commissioning. We discuss below the revision:
�� Adani Power. We adjust for currency depreciation and delay in commercial generation
from Mundra IV and Tiroda units. We have revised our EPS estimate for FY2012E/13E by
11% and 18%, respectively and reduced our target price to Rs74 (previously Rs81). We
continue to remain cautious on APL (REDUCE) as we see potential earnings risks from (1)
potential incidence of MAT (as per amendment proposed in Union Budget 2011) which
could erode Rs8/share from our fair value estimate, (2) pricing and availability of domestic
coal for Tiroda plants and (3) potential renegotiation of coal price by AEL (currently at
US$36/ton) in light of the minimum price obligation on all coal export contracts being
implemented by Indonesia.
�� JSW Energy. We have revised our EPS estimate for FY2012E/13E by 25%/27% and
reduced our target price to Rs43 (previously Rs53). We note that the impact of currency
depreciation is the highest for JSW Energy due to its near-complete dependence on
imported coal. Despite softening of coal prices and improving short-term tariffs and PLFs
as well as sharp correction in stock price, we believe that the business model is excessively
levered to spot markets and poses significant earnings risk. Further, the portfolio offers
limited growth visibility with the extant set of under-construction portfolio nearing
completion and limited progress on pipeline projects.
�� Reliance Power. We have reduced our PLF assumptions for the Chitrangi project from
85% to 80% taking cognizance of the growing uncertainty over the possibility of
diversion of surplus captive coal from Sasan to Chitrangi (in light of the recent report by
Comptroller and Auditor General of India, or CAG, questioning such a diversion). The
Empowered Group of Minister (EGoM) has now referred the case to the Attorney General
of India. We currently assume that 60% of Chitrangi’s fuel requirements will be met from
captive coal and any unfavorable judgment could significantly erode the profitability and
valuations of Chitrangi (currently contributes 50% of our SOTP-based valuation of
Reliance Power). Further, falling output of KG D6 gas production adds on to the fuel
woes of the 2,262 MW Samalkot project, which is nearing completion. We have revised
our FY2013E EPS estimate by 9% and reduced our target price to Rs76 (previously Rs87).
�� Reliance Infrastructure. We have reduced our target price for Reliance Infrastructure to
Rs890 (from Rs920) as we adjust for lower value for its 38% holding in Reliance Power.
�� NTPC. We have reduced our target price to Rs175 (previously Rs180) as we adjust for
commissioning delays. We note that NTPC has commissioned just 1,160 MW (commercial
operation for just 660 MW) in FY2012 so far against a targeted addition of 4,320 MW for
FY2012E.
�� NHPC. We upgrade NHPC to BUY (from ADD) noting recent correction in the stock price.
We maintain our target price of Rs29.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Utilities
India
Respite in the near term though structural issues remain. The utilities sector may
see some respite in the near term with (1) improving utilization rates, (2) softening
prices of imported coal, although partially offset by a depreciating currency, and
(3) improved rates in the spot market. While the positives may give some earning
respite in the near term, the absence of remedial action to solve the impending coal
deficit prevents us from taking a constructive view on the sector.
PLFs and short-term rates showing some improvement
Average exchange tariffs (IEX) have improved significantly through December, aided by improved
demand (15% yoy) leading to an increase in energy deficit—above 10% for the first time since
June 2010 (see Exhibit 1).
All-India thermal PLF increased by 240 bps yoy in November 2011 with some large merchant
capacities improving PLFs meaningfully (see Exhibit 2). We note that increased demand could likely
be attributed to the recent round of tariff hikes carried out by various state distribution utilities and
a corresponding boost in purchasing power and credit respite.
Softening in global coal prices, partially offset by depreciating currency
Global coal prices have corrected by ~20% from their peak levels of US$130/ton (see Exhibit 6),
though benefits of falling coal prices will be partially offset by 18% depreciation in the currency
during the same period. In light of the apparent global slowdown, we do not rule out further
correction in coal prices though note that benefits for imported coal-based plants will be muted
owing to a weaker Rupee (KIE’s Economic Research team estimates further depreciation bias in the
currency).
Fuel woes still loom large, preventing us to take a constructive view
Despite the improvement in PLFs and merchant tariffs, we are unable to take a constructive view
on the sector as we do not see any near-term resolution of the country’s fuel woes—(1) domestic
coal production continues to lag requirement, and (2) output from Reliance’s KG D6 continues to
drop, posing serious threat to the viability of both extant and future gas-based capacities.
Although we are encouraged by the tariff revisions and urgency shown by policymakers to address
the problem of deteriorating financials of SEBs, we still believe that PLFs (and hence the
profitability) of high-cost producers of power will continue to be under threat.
Positive on resource owners, low-cost generators
We maintain our cautious stance on the sector and recommend aligning with utilities with
(1) access to fuel or resource ownership, (2) integrated operations, and (3) low-cost generation
that better combat the current fuel deficit and questionable financial health of state electricity
boards. NHPC, Tata Power and CESC in our coverage universe are better-positioned to cope with
the current situation in the power sector. We recommend avoiding private-sector generators that
have (1) high dependence on merchant sales, and/or (2) dependence on linked coal or spot
purchases of coal (imported or e-auction).
Revise earnings to account for depreciating currency and commissioning delays
We have revised our earnings estimates and target prices for JSW Energy, Adani Power, Reliance
Power and NTPC to adjust for currency depreciation and/or commissioning delays
Revise estimates and target prices to align with currency depreciation and delay
in commissioning
We have revised our estimates and target prices to adjust for currency depreciation and/or
delay in commissioning. We discuss below the revision:
�� Adani Power. We adjust for currency depreciation and delay in commercial generation
from Mundra IV and Tiroda units. We have revised our EPS estimate for FY2012E/13E by
11% and 18%, respectively and reduced our target price to Rs74 (previously Rs81). We
continue to remain cautious on APL (REDUCE) as we see potential earnings risks from (1)
potential incidence of MAT (as per amendment proposed in Union Budget 2011) which
could erode Rs8/share from our fair value estimate, (2) pricing and availability of domestic
coal for Tiroda plants and (3) potential renegotiation of coal price by AEL (currently at
US$36/ton) in light of the minimum price obligation on all coal export contracts being
implemented by Indonesia.
�� JSW Energy. We have revised our EPS estimate for FY2012E/13E by 25%/27% and
reduced our target price to Rs43 (previously Rs53). We note that the impact of currency
depreciation is the highest for JSW Energy due to its near-complete dependence on
imported coal. Despite softening of coal prices and improving short-term tariffs and PLFs
as well as sharp correction in stock price, we believe that the business model is excessively
levered to spot markets and poses significant earnings risk. Further, the portfolio offers
limited growth visibility with the extant set of under-construction portfolio nearing
completion and limited progress on pipeline projects.
�� Reliance Power. We have reduced our PLF assumptions for the Chitrangi project from
85% to 80% taking cognizance of the growing uncertainty over the possibility of
diversion of surplus captive coal from Sasan to Chitrangi (in light of the recent report by
Comptroller and Auditor General of India, or CAG, questioning such a diversion). The
Empowered Group of Minister (EGoM) has now referred the case to the Attorney General
of India. We currently assume that 60% of Chitrangi’s fuel requirements will be met from
captive coal and any unfavorable judgment could significantly erode the profitability and
valuations of Chitrangi (currently contributes 50% of our SOTP-based valuation of
Reliance Power). Further, falling output of KG D6 gas production adds on to the fuel
woes of the 2,262 MW Samalkot project, which is nearing completion. We have revised
our FY2013E EPS estimate by 9% and reduced our target price to Rs76 (previously Rs87).
�� Reliance Infrastructure. We have reduced our target price for Reliance Infrastructure to
Rs890 (from Rs920) as we adjust for lower value for its 38% holding in Reliance Power.
�� NTPC. We have reduced our target price to Rs175 (previously Rs180) as we adjust for
commissioning delays. We note that NTPC has commissioned just 1,160 MW (commercial
operation for just 660 MW) in FY2012 so far against a targeted addition of 4,320 MW for
FY2012E.
�� NHPC. We upgrade NHPC to BUY (from ADD) noting recent correction in the stock price.
We maintain our target price of Rs29.
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