Indian utilities - merchant power Monsoon prices…still look low ::Macquarie Research,

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Indian utilities - merchant power
Monsoon prices…still look low
Event
􀂃 The CERC released its forward curve for June, a few days after the May
curve, which sings the same tune. Forward bilateral prices over monsoon (this
time into October) remain under Rs4/kWh. Remember, we don’t have the
insight on whether these contracts are ex-bus bar (ex transmission) or
delivered (realised price would be even lower).
􀂃 We still prefer to avoid IPPs such as JSW Energy (JSW IN, Rs67,
Underperform, TP: Rs51), with Adani Power (ADANI IN, Rs108, Neutral, TP
Rs116) our preferred exposure. According to industry sources, there remains
a lack of visible demand coming from SEBs, while significant upcoming untied
capacities with fuel security and ongoing upward pressure on fuel costs keep
us Underweight Utilities.
Impact
􀂃 Forward pricing remains at Rs.3.60–3.70/kWh Aug-Oct, with only 20% of
bilateral contracts struck in June coming in above Rs4.00/kWh, vs 28% in
May and 96% in April. Volume of bilateral merchant contracts increased to
3,276GWh in June from 2,737GWh in May. Of the 86 contracts in June, 34%
were NTPC trading, 31% PTC, 14% GMR trading, 12% Tata Power trading,
5% JSW trading, 2% Lanco trading and 1% RPG.
􀂃 Recent tariff increases mostly noise, doesn’t save the day for SEBs: As
noted by Tata Power (TPWR IN, Rs1,294, Outperform, TP: Rs1,553) senior
management who we were travelling with over the past week, it is difficult for
most SEBs to increase tariffs any more than 10–12% pa, which doesn’t solve
the loss scenario for many years. A private discom we met last week
highlighted that noise around enforcing a 'duty to serve' is selectively being
put on the private discoms – while little action towards State Government
discoms – where the losses are.
􀂃 “If anything, conditions are getting worse”… was the key takeaway from
industry meetings over the past few weeks. Weaker demand from SEBs was
the key issue in all meetings, with key power buying states not in the market
(merchant or Case 1 bids). Price expectations from traders over the next 12
months have fallen from ~Rs4/kWh three months ago to Rs3.30–3.80/kWh.
Appetite from some seasonal monsoon buyers (Haryana/Delhi) is expected to
be weaker this year, while new supply is expected to overload both bilateral
and exchange markets. The IEX does not expect industrial demand to absorb
supply on the exchange anytime soon.
Outlook
􀂃 While 1Q11 earnings may likely be supported by higher summer pricing,
heading into a seasonal weaker pricing period, we would be cautious on
merchant power exposure.