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Indian Utilities: cost of coal
What if thermal prices fall?
Event
Due to increasing fears over global growth, we highlight earnings/valuation
sensitivities from softer thermal coal prices. In the Indian utility space, the best
placed to benefit from lower thermal coal prices are JSW Energy (JSW IN,
Rs61.65, Underperform, Rs55) followed by Adani Power (ADANI IN, Rs91.60,
Neutral, TP Rs106). Tata Power (TPWR IN, Rs1,180, Outperform, TP
Rs1,553) would be the most adversely impacted due to its 30% stake in the
KPC and Arutmin coal mines.
Throughout 2Q12, we think that soft merchant power prices will overshadow
coal price weakness leading to potential earnings downgrades. However
beyond the results, should coal prices soften, the earnings outlook for IPPs
may improve.
Impact
Our view on pricing – still bullish, but weaker demand can’t be ruled out:
despite oil coming off 16% over the past month, thermal coal prices have
remained resilient. That said, weaker economic growth indicators could see
more investors becoming nervous on the industrial growth outlook, especially
in China, which could lead to softer thermal coal demand. We highlight
earnings sensitivities in the India power sector to thermal coal price changes.
Low thermal coal prices, good for Indian power demand: due to the poor
financial position of State Electricity Boards, power procurement is highly
elastic to pricing. As highlighted by NTPC’s Chairman in May 2011, “We are
blending about 10% imported coal at our power plants now, and the price of
power has increased by 30 paisa per unit and people are not buying that
power”. Coal traders tell us at US$100/t, coal import demand for power hits a
wall. Therefore should coal prices fall, the demand for imported coal fired
power could well increase due to higher affordability.
JSW Energy the biggest winner of lower thermal prices: with the highest
cost structure and currently operating on 100% imported coal, JSW would be
the biggest beneficiary of softer thermal coal prices. Secondly, Adani Power,
with more units being commissioned at Mundra in FY12 and unlikely
deliveries of domestic coal linkages, would also be a beneficiary. Conversely,
Tata Power is a net loser of softening thermal prices due to its producing
KPC/Arutmin assets in Indonesia.
Outlook
Our sector view is that softer 2Q12 merchant prices could put pressure on
near-term earnings for IPPs such as JSW Energy and Adani Power. Beyond
2Q12, a softer coal price environment would certainly improve the earnings
outlook as realisations could bottom and operating costs fall.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Utilities: cost of coal
What if thermal prices fall?
Event
Due to increasing fears over global growth, we highlight earnings/valuation
sensitivities from softer thermal coal prices. In the Indian utility space, the best
placed to benefit from lower thermal coal prices are JSW Energy (JSW IN,
Rs61.65, Underperform, Rs55) followed by Adani Power (ADANI IN, Rs91.60,
Neutral, TP Rs106). Tata Power (TPWR IN, Rs1,180, Outperform, TP
Rs1,553) would be the most adversely impacted due to its 30% stake in the
KPC and Arutmin coal mines.
Throughout 2Q12, we think that soft merchant power prices will overshadow
coal price weakness leading to potential earnings downgrades. However
beyond the results, should coal prices soften, the earnings outlook for IPPs
may improve.
Impact
Our view on pricing – still bullish, but weaker demand can’t be ruled out:
despite oil coming off 16% over the past month, thermal coal prices have
remained resilient. That said, weaker economic growth indicators could see
more investors becoming nervous on the industrial growth outlook, especially
in China, which could lead to softer thermal coal demand. We highlight
earnings sensitivities in the India power sector to thermal coal price changes.
Low thermal coal prices, good for Indian power demand: due to the poor
financial position of State Electricity Boards, power procurement is highly
elastic to pricing. As highlighted by NTPC’s Chairman in May 2011, “We are
blending about 10% imported coal at our power plants now, and the price of
power has increased by 30 paisa per unit and people are not buying that
power”. Coal traders tell us at US$100/t, coal import demand for power hits a
wall. Therefore should coal prices fall, the demand for imported coal fired
power could well increase due to higher affordability.
JSW Energy the biggest winner of lower thermal prices: with the highest
cost structure and currently operating on 100% imported coal, JSW would be
the biggest beneficiary of softer thermal coal prices. Secondly, Adani Power,
with more units being commissioned at Mundra in FY12 and unlikely
deliveries of domestic coal linkages, would also be a beneficiary. Conversely,
Tata Power is a net loser of softening thermal prices due to its producing
KPC/Arutmin assets in Indonesia.
Outlook
Our sector view is that softer 2Q12 merchant prices could put pressure on
near-term earnings for IPPs such as JSW Energy and Adani Power. Beyond
2Q12, a softer coal price environment would certainly improve the earnings
outlook as realisations could bottom and operating costs fall.
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