Indian utilities - Delhi days:: Industry kicks in; is Rs4/kWh the bottom? Macquarie

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Indian utilities - Delhi days:: Industry kicks in; is Rs4/kWh the bottom?

Event
􀂃 We went up to Delhi for our monthly visit to see our industry contacts. Power
traders are still bearish on bilateral prices in the short term, with most
expecting ~Rs.4/kWh to represent a floor. Surprisingly, industry volumes on
the Indian Energy Exchange (IEX) have picked up massively, providing some
support. Concerns over transmission constraints from traders were far less
than six months ago, on greater confidence in inter-regional capacity.


􀂃 We have been more cautious recently, highlighting NTPC (Outperform) as a
good defensive pick, while Power Grid (Neutral) is starting to look interesting
closer to Rs90/sh. Adani Power (Outperform) remains our key IPP pick, while
Tata Power (Outperform) has significantly underperformed its coal peers,
which could lead to shorter-term upside.

Impact
􀂃 Power traders are still bearish, highlighting load shedding and low bilateral
prices during the month. Amid such bearishness, we asked traders about their
views of a floor in bilateral power pricing, where buying appetite was seen.
Most agreed that at ~Rs.4/kWh, the State Electricity Board (SEB) is generally
happy to enter bilateral contracts and at ~Rs4.00–4.50/kWh, there is industrial
appetite but industrial is unlikely to drive prices in the short term.

􀂃 Industrial customers have a bigger share of demand: There has been a
massive flip on the power exchange, where we understand industrial consumers
now represent ~80% of volumes vs earlier this year when 75–80% of the
volumes were the SEB’s. The IEX’s view is that low pricing on the exchange is a
phase post-monsoon and it expects prices to head towards bilateral prices; in
our view, they should trade at a discount on higher transmission risk and lack of
liquidity. Bilateral traders noted that while the SEB still dominates volumes
(~10% industrial customers), the trend has shifted from two years ago when
industrial user demand in the bilateral market was non-existent. Traders noted
that states are under pressure to give open access to industrial users.

􀂃 What could be a trigger to pop up pricing? While the SEB’s appetite is
the real driver of demand, all the contacts we met with highlighted that Tamil
Nadu should start buying more aggressively, heading into elections (2–
3 months’ prior to state elections estimated in May 2011), which could see
support for power prices, and also heading into the summer.

􀂃 Less concern over transmission: The traders were also unanimous in
believing that concerns over transmission capacity have waned, with even the
IEX relatively bullish on transmission capacity, saying that excess capacity in
the system has allowed for greater volumes. They were more concerned
about the distribution aspect, which points to a lack of political reform.

Outlook
􀂃 We advise investors to stay away from highly leveraged plays such as JSW
Energy (Neutral) and more high-risk execution plays such as Reliance Power
(Underperform).