DB - Indian Infrastructure - Needing much more than help from the weather gods

We are encouraged by the monsoon, which is above normal, widespread and
could help arrest the dip in India's water tables. This is good news for the
economy as a whole, as power deficits decline, both from lower demand from
the subsidized agri sector and higher supply from low-cost hydro. However, for
the majority of infrastructure projects, built on structural shortages, this would
mean a push-back in earnings. Notwithstanding strong 2H demand, we cut
Coal India estimates by 4% to factor in the likely H1 miss, similar to cuts we
made for the cement companies. Even for DG sets, sales may be pushed back,
not good news for CUMM (Hold) and merchant power player IPPs.

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Initial metrological data for monsoon is encouraging
The spatial distribution of rainfall during this South West monsoon (which
typically accounts for 80% of annual rainfall) has been quite encouraging, with
over 75% of the country receiving excess rainfall – the best in the last 15 years,
the period for which data is available. More importantly, of the 36 subdivisions,
only the five in the North East have received scanty rainfall (defined as 60-99%
below the long-period average), while 27 have received excess rainfall (defined
as 20% or more than the long-period average).
Interesting implications for our coverage
At the macro level, a good monsoon helps bring down power cost curves,
reducing the deficit as water pump demand for agriculture comes down – a big
positive for distribution companies’ cash flows and claimants of this cash flow
– i.e. power genco/banks. However, for IPPs, a strong monsoon may see a fall
in thermal power demand – putting further stress on offtake from Coal India.
While our data shows that post a good monsoon, volumes of coal pick up in
late H2 (similar to the cement sector, as discussed in our note dated 21 June
2013), the gains of these volumes may not help offset H1 losses.
􀂄 Coal India – We cut production and sales estimates by 4% for FY14E from
466 mnt and 480 mnt vs. guidance of 482 mnt and 492 mnt, respectively.
􀂄 Cummins India – No change, but Street estimates may now trend closer to
ours (the lowest on the Street). Recent rupee weakness is a positive.
􀂄 IPP Power – Exchange prices could drop; risk for JSPL, JPVL and Shree
Cement. JSW Energy is the least affected by exchange variations.
􀂄 NTPC – No change. We have assumed 87% availability – lower than last
year. In FY11, NTPC PLF fell by 800 bps due to good monsoon.
A difficult balancing act
We reiterate Buy on Coal India and Hold on Cummins India, with both their
models geared to benefit from rupee depreciation. The key risk for Coal India is
a sharp drop in international coal prices. A 5% drop implies a 3% drop in EPS.
For Cummins India, a sharp drop in diesel prices may push up demand, and a
sharp drop/rise in steel prices could lift/bring down margins.