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UBS Investment Research
Asia On The Ground: India Power Utilities
Meetings with key sector participants
We met with various Indian power sector participants last week
We met with several power sector participants over the past week (21-22 March in
Delhi and NCR and 26 March in Ahmadabad). We met senior officials in the
power ministry, the Central Electricity Authority (CEA), the Central Electricity
Regulatory Commission (CERC), power generation companies, electricity trading
companies, power equipment manufacturers and gas companies.
We wanted an update on the coal supply scenario and SEB losses
The key objective behind these meetings was to get the recent sector views of
industry participants. We wanted to understand: 1) the current coal supply scenario
in India and the medium-term outlook; 2) implications of the poor financial health
of the state electricity boards (SEBs) for power generation sector; and 3) the
outlook on expected sector profitability and returns on investment.
Coal supply a short-term concern; SEBs unlikely to default in near term
Our findings: 1) coal supply is only a short-term concern, as supply in medium
term should increase from both Coal India and power companies’ captive mines;
2) the poor financial health and losses of SEBs is a big concern, but SEBs are
unlikely to default in next two to three years; 3) reasonable returns (20-25% ROE)
are not under threat.
UBS view and action: Lanco (Buy), NTPC (Buy) are our top picks
We prefer Lanco (attractive valuation) and NTPC (good defensive) in the sector.
We also have Buy ratings on Reliance Infrastructure, Power Grid, and Tata Power.
We think the near-term investor concerns could remain. However, in the medium
to long term, we believe the sector will be an attractive investment.
Meetings with sector participants
Over the past week, we met with various sector participants (the power ministry
and the central electricity authority, the central regulator, power generation
companies, electricity trading companies, equipment manufacturers and gas
companies) to get their recent views on the sector. We met with:
— the Ministry of Power (two joint secretaries in the ministry)
— the Central Electricity Authority (the central planning authority in power
sector)
— CERC (central regulator)
— NTPC
— BHEL
— PTC India (largest power trader in India)
— Lanco
— Indraprasth Gas
— Adani Power
Our meetings were on 21-22 March in Delhi and NCR and on 26 March in
Ahmadabad.
Key objectives for the meetings
YTD, Indian power sector has performed poorly in our coverage universe and
the stocks have corrected 17%. Given concerns about the outlook for the sector,
we decided to meet with the key participants in the sector to get their views on
several issues. Our key objective behind these meetings was to get the most
recent views of participants on the sector. Specifically, we wanted to
understand:
the current coal supply scenario in India and medium-term outlook
implications of the poor financial health of SEBs for power generating sector
outlook for the profitability of merchant power capacities compared with the
long-term PPA-based capacity
views on potential sector profitability and returns on investment.
What did we discuss in our meetings?
1) Mr Devender Singh, Joint Secretary, Ministry of Power
Mr Singh highlighted that the central government is persuading several state
governments to implement distribution reforms and the Accelerated Power
Development and Reform Programme (APDRP). His view was that major
events in the sector, such as SEBs defaulting, were unlikely.
2) Mr Rakesh Jain, Joint Secretary, Ministry of Power
Mr Jain’s view was that the sustainability of the Rs5+ merchant tariff was
doubtful once SEBs started procuring a higher percentage of their power from
Meetings with sector participants
Over the past week, we met with various sector participants (the power ministry
and the central electricity authority, the central regulator, power generation
companies, electricity trading companies, equipment manufacturers and gas
companies) to get their recent views on the sector. We met with:
— the Ministry of Power (two joint secretaries in the ministry)
— the Central Electricity Authority (the central planning authority in power
sector)
— CERC (central regulator)
— NTPC
— BHEL
— PTC India (largest power trader in India)
— Lanco
— Indraprasth Gas
— Adani Power
Our meetings were on 21-22 March in Delhi and NCR and on 26 March in
Ahmadabad.
Key objectives for the meetings
YTD, Indian power sector has performed poorly in our coverage universe and
the stocks have corrected 17%. Given concerns about the outlook for the sector,
we decided to meet with the key participants in the sector to get their views on
several issues. Our key objective behind these meetings was to get the most
recent views of participants on the sector. Specifically, we wanted to
understand:
the current coal supply scenario in India and medium-term outlook
implications of the poor financial health of SEBs for power generating sector
outlook for the profitability of merchant power capacities compared with the
long-term PPA-based capacity
views on potential sector profitability and returns on investment.
What did we discuss in our meetings?
1) Mr Devender Singh, Joint Secretary, Ministry of Power
Mr Singh highlighted that the central government is persuading several state
governments to implement distribution reforms and the Accelerated Power
Development and Reform Programme (APDRP). His view was that major
events in the sector, such as SEBs defaulting, were unlikely.
2) Mr Rakesh Jain, Joint Secretary, Ministry of Power
Mr Jain’s view was that the sustainability of the Rs5+ merchant tariff was
doubtful once SEBs started procuring a higher percentage of their power from
(2) Coal supply: a) this is only a short-term concern, domestic coal supply
should increase from Coal India and the captive mines of power companies
in medium term; b) imports would continue to grow faster than domestic
coal supply; c) a major adverse impact on PLFs or utilisation rates of coalfired
power plants were unlikely.
(3) Merchant tariffs: Sustainability of Rs5+ merchant tariffs became doubtful
once SEBs started procuring a higher percentage of their power from the
spot market. However, merchant tariffs would remain attractive compared
with long-term PPAs for a few more years.
(4) SEB losses: the poor financial health and losses of SEBs is a big concern.
a) Progress in distribution reform remains slow; b) this could impact the
power generating sector; nonetheless c) SEBs are unlikely to default in the
near term (next two to three years).
(5) Outlook for the sector: a) it is good that the irrational expectations built
on the basis of very high merchant tariffs have been managed; and b)
reasonable returns (20-25% ROE) are not under threat in power sector.
(6) Private vs. state utilities: Private companies are executing better than
state-owned companies, especially Tata Power, Lanco and Adani Power.
This has helped capacity addition in India.
(7) Transmission & distribution (T&D) reform: After generation, the focus
would be on T&D. There has been progress at various levels. However, due
to political issues, distribution reforms may materialise only if they are
absolutely necessary.
UBS view
(1) We think the coal supply and pricing have become the most talked-about
issue for power companies. Based on our proprietary work, we think: a)
there is very little risk to earnings of companies under our coverage, as they
have captive coal and/or fuel cost pass-through; b) power shortages imply
any additional fuel cost can be passed on; and c) the biggest risk is for
companies with non-captive imported coal with merchant capacity. Please
refer to Is coal a constraint for India power story?, published on 14
January 2011.
(2) SEBs’ poor financial health and losses would remain a big concern in the
short term. We think the reason is that progress in distribution reforms
remains slow and this could impact the power generation sector’s
profitability. However, we think major events such as SEBs defaulting in
the next two to three years is highly unlikely.
(3) We think the near-term concerns such as fuel supply and lower merchant
tariffs are likely to remain. However, in the medium to long term, we
believe the sector will be an attractive investment opportunity as we expect
the power deficit to persist. There has been some progress in reforms.
(4) We estimate the power deficit is likely to prevail, at least until FY17, based
on our demand and capacity addition analysis. We still do not expect
financing issues for companies with fuel, power purchase agreements, and
proven strength in execution.
(5) We believe there is a three-year window of opportunity to earn better-thanlong-
term PPA return on merchant power capacity.
Key stock ideas: top picks (Lanco and NTPC)
We prefer Lanco and NTPC in the sector. We also have Buy ratings on Reliance
Infrastructure, Power Grid and Tata Power.
Lanco
We believe Lanco’s share price performance YTD has been affected by poor
sentiment on the Indian infrastructure sector and concerns about the reasons
behind two changes in Lanco’s deprecation accounting policies, coal supply
security, and project implementation.
In our note Share price implying unlikely events, dated 14 February 2011, we
performed stress-test valuations and concluded that the current share price is
implying either: 1) that 65% of projects under construction will stall and the
company will have to bear debt and contract liabilities for them; or 2) the coalbased
projects are not contributing any value. We believe either of these
scenarios materialising is unlikely.
We maintain our Buy rating on Lanco and price target of Rs70.00. We derive
our price target from a sum-of-the-parts methodology. We value Lanco as a
conglomerate, with power contributing 67% of the valuation and EPC 23%. We
think the stock is attractive at the current level and reiterate our Buy rating. The
stock is trading at 9.4x FY12E earnings and 5.6x FY13E earnings.
NTPC
We like NTPC as we think its fundamentals are intact and its valuation is
attractive at the current level. The key positives for NTPC are: 1) the
considerable demand-supply gap in India; 2) largest capacity in India; and 3)
competitive cost of generation and fuel cost pass-through.
We maintain our Buy rating and DCF-based price target of Rs215.00. Our key
assumptions are: 1) a risk-free rate of 8.1%, 2) five-year intermediate growth of
7.5%; and 3) terminal growth of 5%.
Appendix: The meetings
We met with the following people:
(1) Mr Devender Singh, Joint Secretary, Ministry of Power (New Delhi, 21
March) and
(2) Mr Rakesh Jain, Joint Secretary, Ministry of Power (New Delhi, 22
March)
The Ministry of Power is primarily responsible for the development of
electricity in India. It is involved with planning, policy formulation,
reviewing projects for investment decisions, monitoring the implementation
of power projects, training and manpower development and the
administration and enactment of legislation on thermal, hydro power
generation, transmission and distribution. The Ministry of Power is
responsible for the Administration of the Electricity Act, 2003, the Energy
Conservation Act, 2001. Mr Singh is responsible for Rural Electrification,
Accelerated Power Development and Reform Programme (APDRP) and
other distribution related matters. Mr. Jain is Joint Secretary (FA).
(3) Mr AS Bakshi, Member (Planning), Central Electricity Authority
(New Delhi, 21 March)
The Central Electricity Authority (CEA) is a statutory organisation. It was
established as a temporary organisation in 1951 and made a full-time one in
1975. CEA’s responsibility is to advise the central government on matters
relating to the national electricity policy and formulate short-term and longterm
plans to develop power systems. CEA also coordinate the activities of
the planning agencies for the optimal utilisation of resources and to provide
reliable and affordable electricity to all consumers.
(4) Mr S Jayaraman, Member, CERC (Central Electricity Regulatory
Commission, New Delhi, 22March)
CERC is a statutory body functioning under Section 76 of the Electricity
Act 2003 (CERC was initially constituted under the Electricity Regulatory
Commissions Act, 1998 on 24 July 1998). The Commission intends to
promote competition, efficiency and economy in bulk power markets,
improve the quality of supply, promote investments and advise the
government on the removal of institutional barriers to bridge the demand
supply gap and thus foster the interests of consumers.
(5) Mr A K Singhal, Director (Finance) and Ms Sangeeta Bhatia (GM),
NTPC (New Delhi, 21) March)
(6) Mr W V K Krishna Shankar, Executive Director, BHEL (New Delhi,
22 March)
(7) Mr. Rajesh Vedvyas, Managing Director, Indraprasth Gas Limited
(New Delhi, 22 March)
(8) Mr. K Venugopal, Sr. VP (Finance) and Pranav Mehta (Investor
Relations), Adani Power (Ahmedabad, 26 March)
(9) Mr Saurabh Garg, Investor Relations, Lanco (Gurgaon, 21 March)
(10) Mr Kunal Yadav (AVP) and Mr. Varun Sethi (Manager), PTC India
Limited (New Delhi, 21 March)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asia On The Ground: India Power Utilities
Meetings with key sector participants
We met with various Indian power sector participants last week
We met with several power sector participants over the past week (21-22 March in
Delhi and NCR and 26 March in Ahmadabad). We met senior officials in the
power ministry, the Central Electricity Authority (CEA), the Central Electricity
Regulatory Commission (CERC), power generation companies, electricity trading
companies, power equipment manufacturers and gas companies.
We wanted an update on the coal supply scenario and SEB losses
The key objective behind these meetings was to get the recent sector views of
industry participants. We wanted to understand: 1) the current coal supply scenario
in India and the medium-term outlook; 2) implications of the poor financial health
of the state electricity boards (SEBs) for power generation sector; and 3) the
outlook on expected sector profitability and returns on investment.
Coal supply a short-term concern; SEBs unlikely to default in near term
Our findings: 1) coal supply is only a short-term concern, as supply in medium
term should increase from both Coal India and power companies’ captive mines;
2) the poor financial health and losses of SEBs is a big concern, but SEBs are
unlikely to default in next two to three years; 3) reasonable returns (20-25% ROE)
are not under threat.
UBS view and action: Lanco (Buy), NTPC (Buy) are our top picks
We prefer Lanco (attractive valuation) and NTPC (good defensive) in the sector.
We also have Buy ratings on Reliance Infrastructure, Power Grid, and Tata Power.
We think the near-term investor concerns could remain. However, in the medium
to long term, we believe the sector will be an attractive investment.
Meetings with sector participants
Over the past week, we met with various sector participants (the power ministry
and the central electricity authority, the central regulator, power generation
companies, electricity trading companies, equipment manufacturers and gas
companies) to get their recent views on the sector. We met with:
— the Ministry of Power (two joint secretaries in the ministry)
— the Central Electricity Authority (the central planning authority in power
sector)
— CERC (central regulator)
— NTPC
— BHEL
— PTC India (largest power trader in India)
— Lanco
— Indraprasth Gas
— Adani Power
Our meetings were on 21-22 March in Delhi and NCR and on 26 March in
Ahmadabad.
Key objectives for the meetings
YTD, Indian power sector has performed poorly in our coverage universe and
the stocks have corrected 17%. Given concerns about the outlook for the sector,
we decided to meet with the key participants in the sector to get their views on
several issues. Our key objective behind these meetings was to get the most
recent views of participants on the sector. Specifically, we wanted to
understand:
the current coal supply scenario in India and medium-term outlook
implications of the poor financial health of SEBs for power generating sector
outlook for the profitability of merchant power capacities compared with the
long-term PPA-based capacity
views on potential sector profitability and returns on investment.
What did we discuss in our meetings?
1) Mr Devender Singh, Joint Secretary, Ministry of Power
Mr Singh highlighted that the central government is persuading several state
governments to implement distribution reforms and the Accelerated Power
Development and Reform Programme (APDRP). His view was that major
events in the sector, such as SEBs defaulting, were unlikely.
2) Mr Rakesh Jain, Joint Secretary, Ministry of Power
Mr Jain’s view was that the sustainability of the Rs5+ merchant tariff was
doubtful once SEBs started procuring a higher percentage of their power from
Meetings with sector participants
Over the past week, we met with various sector participants (the power ministry
and the central electricity authority, the central regulator, power generation
companies, electricity trading companies, equipment manufacturers and gas
companies) to get their recent views on the sector. We met with:
— the Ministry of Power (two joint secretaries in the ministry)
— the Central Electricity Authority (the central planning authority in power
sector)
— CERC (central regulator)
— NTPC
— BHEL
— PTC India (largest power trader in India)
— Lanco
— Indraprasth Gas
— Adani Power
Our meetings were on 21-22 March in Delhi and NCR and on 26 March in
Ahmadabad.
Key objectives for the meetings
YTD, Indian power sector has performed poorly in our coverage universe and
the stocks have corrected 17%. Given concerns about the outlook for the sector,
we decided to meet with the key participants in the sector to get their views on
several issues. Our key objective behind these meetings was to get the most
recent views of participants on the sector. Specifically, we wanted to
understand:
the current coal supply scenario in India and medium-term outlook
implications of the poor financial health of SEBs for power generating sector
outlook for the profitability of merchant power capacities compared with the
long-term PPA-based capacity
views on potential sector profitability and returns on investment.
What did we discuss in our meetings?
1) Mr Devender Singh, Joint Secretary, Ministry of Power
Mr Singh highlighted that the central government is persuading several state
governments to implement distribution reforms and the Accelerated Power
Development and Reform Programme (APDRP). His view was that major
events in the sector, such as SEBs defaulting, were unlikely.
2) Mr Rakesh Jain, Joint Secretary, Ministry of Power
Mr Jain’s view was that the sustainability of the Rs5+ merchant tariff was
doubtful once SEBs started procuring a higher percentage of their power from
(2) Coal supply: a) this is only a short-term concern, domestic coal supply
should increase from Coal India and the captive mines of power companies
in medium term; b) imports would continue to grow faster than domestic
coal supply; c) a major adverse impact on PLFs or utilisation rates of coalfired
power plants were unlikely.
(3) Merchant tariffs: Sustainability of Rs5+ merchant tariffs became doubtful
once SEBs started procuring a higher percentage of their power from the
spot market. However, merchant tariffs would remain attractive compared
with long-term PPAs for a few more years.
(4) SEB losses: the poor financial health and losses of SEBs is a big concern.
a) Progress in distribution reform remains slow; b) this could impact the
power generating sector; nonetheless c) SEBs are unlikely to default in the
near term (next two to three years).
(5) Outlook for the sector: a) it is good that the irrational expectations built
on the basis of very high merchant tariffs have been managed; and b)
reasonable returns (20-25% ROE) are not under threat in power sector.
(6) Private vs. state utilities: Private companies are executing better than
state-owned companies, especially Tata Power, Lanco and Adani Power.
This has helped capacity addition in India.
(7) Transmission & distribution (T&D) reform: After generation, the focus
would be on T&D. There has been progress at various levels. However, due
to political issues, distribution reforms may materialise only if they are
absolutely necessary.
UBS view
(1) We think the coal supply and pricing have become the most talked-about
issue for power companies. Based on our proprietary work, we think: a)
there is very little risk to earnings of companies under our coverage, as they
have captive coal and/or fuel cost pass-through; b) power shortages imply
any additional fuel cost can be passed on; and c) the biggest risk is for
companies with non-captive imported coal with merchant capacity. Please
refer to Is coal a constraint for India power story?, published on 14
January 2011.
(2) SEBs’ poor financial health and losses would remain a big concern in the
short term. We think the reason is that progress in distribution reforms
remains slow and this could impact the power generation sector’s
profitability. However, we think major events such as SEBs defaulting in
the next two to three years is highly unlikely.
(3) We think the near-term concerns such as fuel supply and lower merchant
tariffs are likely to remain. However, in the medium to long term, we
believe the sector will be an attractive investment opportunity as we expect
the power deficit to persist. There has been some progress in reforms.
(4) We estimate the power deficit is likely to prevail, at least until FY17, based
on our demand and capacity addition analysis. We still do not expect
financing issues for companies with fuel, power purchase agreements, and
proven strength in execution.
(5) We believe there is a three-year window of opportunity to earn better-thanlong-
term PPA return on merchant power capacity.
Key stock ideas: top picks (Lanco and NTPC)
We prefer Lanco and NTPC in the sector. We also have Buy ratings on Reliance
Infrastructure, Power Grid and Tata Power.
Lanco
We believe Lanco’s share price performance YTD has been affected by poor
sentiment on the Indian infrastructure sector and concerns about the reasons
behind two changes in Lanco’s deprecation accounting policies, coal supply
security, and project implementation.
In our note Share price implying unlikely events, dated 14 February 2011, we
performed stress-test valuations and concluded that the current share price is
implying either: 1) that 65% of projects under construction will stall and the
company will have to bear debt and contract liabilities for them; or 2) the coalbased
projects are not contributing any value. We believe either of these
scenarios materialising is unlikely.
We maintain our Buy rating on Lanco and price target of Rs70.00. We derive
our price target from a sum-of-the-parts methodology. We value Lanco as a
conglomerate, with power contributing 67% of the valuation and EPC 23%. We
think the stock is attractive at the current level and reiterate our Buy rating. The
stock is trading at 9.4x FY12E earnings and 5.6x FY13E earnings.
NTPC
We like NTPC as we think its fundamentals are intact and its valuation is
attractive at the current level. The key positives for NTPC are: 1) the
considerable demand-supply gap in India; 2) largest capacity in India; and 3)
competitive cost of generation and fuel cost pass-through.
We maintain our Buy rating and DCF-based price target of Rs215.00. Our key
assumptions are: 1) a risk-free rate of 8.1%, 2) five-year intermediate growth of
7.5%; and 3) terminal growth of 5%.
Appendix: The meetings
We met with the following people:
(1) Mr Devender Singh, Joint Secretary, Ministry of Power (New Delhi, 21
March) and
(2) Mr Rakesh Jain, Joint Secretary, Ministry of Power (New Delhi, 22
March)
The Ministry of Power is primarily responsible for the development of
electricity in India. It is involved with planning, policy formulation,
reviewing projects for investment decisions, monitoring the implementation
of power projects, training and manpower development and the
administration and enactment of legislation on thermal, hydro power
generation, transmission and distribution. The Ministry of Power is
responsible for the Administration of the Electricity Act, 2003, the Energy
Conservation Act, 2001. Mr Singh is responsible for Rural Electrification,
Accelerated Power Development and Reform Programme (APDRP) and
other distribution related matters. Mr. Jain is Joint Secretary (FA).
(3) Mr AS Bakshi, Member (Planning), Central Electricity Authority
(New Delhi, 21 March)
The Central Electricity Authority (CEA) is a statutory organisation. It was
established as a temporary organisation in 1951 and made a full-time one in
1975. CEA’s responsibility is to advise the central government on matters
relating to the national electricity policy and formulate short-term and longterm
plans to develop power systems. CEA also coordinate the activities of
the planning agencies for the optimal utilisation of resources and to provide
reliable and affordable electricity to all consumers.
(4) Mr S Jayaraman, Member, CERC (Central Electricity Regulatory
Commission, New Delhi, 22March)
CERC is a statutory body functioning under Section 76 of the Electricity
Act 2003 (CERC was initially constituted under the Electricity Regulatory
Commissions Act, 1998 on 24 July 1998). The Commission intends to
promote competition, efficiency and economy in bulk power markets,
improve the quality of supply, promote investments and advise the
government on the removal of institutional barriers to bridge the demand
supply gap and thus foster the interests of consumers.
(5) Mr A K Singhal, Director (Finance) and Ms Sangeeta Bhatia (GM),
NTPC (New Delhi, 21) March)
(6) Mr W V K Krishna Shankar, Executive Director, BHEL (New Delhi,
22 March)
(7) Mr. Rajesh Vedvyas, Managing Director, Indraprasth Gas Limited
(New Delhi, 22 March)
(8) Mr. K Venugopal, Sr. VP (Finance) and Pranav Mehta (Investor
Relations), Adani Power (Ahmedabad, 26 March)
(9) Mr Saurabh Garg, Investor Relations, Lanco (Gurgaon, 21 March)
(10) Mr Kunal Yadav (AVP) and Mr. Varun Sethi (Manager), PTC India
Limited (New Delhi, 21 March)
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