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Indian utilities: merchant power
A soft February forward curve
Event
�� The Central Electricity Regulatory Commission (CERC) released its February
forward curve for bilateral power prices to June. The curve has expanded,
implying that bilateral merchant prices could peak at Rs.4.91/kWh in May, but
then slam down to Rs.3.79/kWh in June, coincidently when several state
elections are over. If this eventuated, the likelihood is that FY12 average
bilateral prices could dip below Rs.4.00/kWh (downside to our FY12
Rs.4.50/kWh forecast).
�� How accurate has the forward curve been? So far it has overestimated prices
with actual bilateral prices coming in on the lower side. In our view there may
be upside risk to the forward prices in the summer months (to May), while it’s
difficult to know the contract volume used to derive the low June price (could
be very thin). Visually, it’s a negative surprise.
�� For a more defensive pick in the sector with absolute upside, we prefer Tata
Power (TPWR IN, Rs1,229.85, OP, TP: Rs1,553) which is trading at a 22%
discount to our SOTP valuation. Jindal Steel and Power (JSP IN, Rs654.30,
OP, TP: Rs962) and Adani Power (ADANI IN, Rs112.65, OP, TP: Rs145) are
our preferred IPPs due to their competitive fuel positions.
Impact
�� February forward curve represents an upward sloping curve till May,
though falls steeply beginning June: The February forward curve represents
an upward sloping curve up to May, signifying price increases over the next two
months. The slope, however, witnesses a steep decline in June, which is in line
with the historical trend of decreasing prices, as monsoon sets in.
�� 75% of volumes traded were below Rs4.00/kWh: Despite volumes
witnessing a 32% month-on-month increase in February, 75% have been
contracted at prices below Rs4.0/kWh, while 70% of the contracts were for
greater than one month.
�� What have we learnt so far from the forward curve: Despite the CERC
only publishing six months of forward curves, actual bilateral prices have on
average come in lower than the implied forward curve price. This could be
due to a stronger monsoon lowering demand more than expected or shorterduration
contracts written during the month offering discounted pricing. Either
way, the forward curve doesn’t get it right.
Outlook
�� We retain our merchant power forecast of Rs4.50/kWh in FY12E, Rs3.50/kWh
FY13 and Rs3.22/kWh for FY14. For a more defensive pick in the sector with
absolute upside, we prefer Tata Power trading at a 22% discount to our SOTP
valuation. JSP and Adani Power are our preferred IPPs due to their
competitive fuel positions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian utilities: merchant power
A soft February forward curve
Event
�� The Central Electricity Regulatory Commission (CERC) released its February
forward curve for bilateral power prices to June. The curve has expanded,
implying that bilateral merchant prices could peak at Rs.4.91/kWh in May, but
then slam down to Rs.3.79/kWh in June, coincidently when several state
elections are over. If this eventuated, the likelihood is that FY12 average
bilateral prices could dip below Rs.4.00/kWh (downside to our FY12
Rs.4.50/kWh forecast).
�� How accurate has the forward curve been? So far it has overestimated prices
with actual bilateral prices coming in on the lower side. In our view there may
be upside risk to the forward prices in the summer months (to May), while it’s
difficult to know the contract volume used to derive the low June price (could
be very thin). Visually, it’s a negative surprise.
�� For a more defensive pick in the sector with absolute upside, we prefer Tata
Power (TPWR IN, Rs1,229.85, OP, TP: Rs1,553) which is trading at a 22%
discount to our SOTP valuation. Jindal Steel and Power (JSP IN, Rs654.30,
OP, TP: Rs962) and Adani Power (ADANI IN, Rs112.65, OP, TP: Rs145) are
our preferred IPPs due to their competitive fuel positions.
Impact
�� February forward curve represents an upward sloping curve till May,
though falls steeply beginning June: The February forward curve represents
an upward sloping curve up to May, signifying price increases over the next two
months. The slope, however, witnesses a steep decline in June, which is in line
with the historical trend of decreasing prices, as monsoon sets in.
�� 75% of volumes traded were below Rs4.00/kWh: Despite volumes
witnessing a 32% month-on-month increase in February, 75% have been
contracted at prices below Rs4.0/kWh, while 70% of the contracts were for
greater than one month.
�� What have we learnt so far from the forward curve: Despite the CERC
only publishing six months of forward curves, actual bilateral prices have on
average come in lower than the implied forward curve price. This could be
due to a stronger monsoon lowering demand more than expected or shorterduration
contracts written during the month offering discounted pricing. Either
way, the forward curve doesn’t get it right.
Outlook
�� We retain our merchant power forecast of Rs4.50/kWh in FY12E, Rs3.50/kWh
FY13 and Rs3.22/kWh for FY14. For a more defensive pick in the sector with
absolute upside, we prefer Tata Power trading at a 22% discount to our SOTP
valuation. JSP and Adani Power are our preferred IPPs due to their
competitive fuel positions.
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