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7/31/2019 Utilities Av 020512
1/31Pleaserefertothedisclaimertowardstheendofthedocument.
IndiaEquityResearc
Utilitie
May02,2012
UtilitiesTurningpointmaybegettingcloser
SectorReport Reforms are likely to be undertaken in FY13f to revive the Indian
power sector. If left unchecked, annual losses of all stateleve
distributingcompanies
are
likely
to
reach
1.2%
of
the
GDP.
Likely
tarif
hikesbyDISCOMsneedtobesupplementedbymeasuresthatwould
ensureasteadycoalsupplytothenewthermalgeneratingcapacityo
c7GW at a stable and reasonable price. The benefits of such reform
and expected firming up of merchant tariffs are likely to improve
earnings from FY14. Even with the wellknown stress, the consensu
forecasts for the power companies FY13 and FY14 earnings growth
exceedthatoftheNifty.This is likelytopreservethepremium inthe
P/EovertheNifty.WeinitiatecoveragewithBuyratingsonNTPCand
ADANI,anAddratingonTPWRandaHoldratingonJSW.
Compellingcase
for
next
phase
of
reforms
in
FY13
If there are no reforms, DISCOM losses, as a percentage of the nominal GDP
arelikelytoreach1.2%byMar14f,aswaswitnessedearlierbetweenFY99and
FY02. As of Dec11, cINR1,627bn, i.e., 32% of the banks, POWF and RECL
exposure to the power sector faces risk. As crisis reaches a tipping point, the
next set of reforms may be initiated; this is visible with the Shunglu
committees report submission, and the presidential directive to Coal India
(COALIN,Add)tosignFSAs.
Tariffislikelytogrowdoubledigits,butbreakevenmayneedmore
DISCOMs of key states need to raise tariffs at a CAGR of 13%58% in FY13f
FY14ftobridgethenetgap.DISCOMsmaybeabletoraisetheARRperunitby
aCAGRof11%inthenextthreeyears.Whilethismayreducelossesto0.8%o
thenominal
GDP
in
FY14f
from
1.0%
in
FY12f,
the
breakeven
may
need
more.
Hurdlestocaptiveminingliftingslowly;benefitsaftertwoyears
Progressonminingatallocatedcaptivecoalblockswasslowduetothego,no
gopolicyoftheMinistryofEnvironment.Thelastsixmonthsrevealsomesign
of the policys removal, but coal extraction may only begin after two years
Capacityof45GWwasapprovedin200610withfuelsuppliesfromthesecoa
blocks,andc7GWmaybecompletedinFY13andFY14.
OutlooklikelytoimproveforearningsfromFY14f
FY14fearningsofprivateutilitieswith largepipelinesmay improveduetothe
likely increase of lowercost domestic coal supply and rise in merchant tariff
forasmallperiodduetotheelectionsscheduledin1H2014.Companiessucha
NTPC and TPWR are relatively protected as a large part of their revenues are
shieldedfromcostincreases.Thestructuralimprovementinprofitabilityarising
fromanticipatedreformsmaybevisibleafterFY14f.
HigherearningsgrowthmaypreservepremiumoverNifty
Consensus forecasts for the power companies FY13f and FY14f earning
growthexceedthoseoftheNifty.Thisislikelytopreservethepremiumofthe
power indexovertheNifty.We initiatecoverageonNTPC(Buy),ADANI(Buy)
TPWR (Add) and JSW (Hold). Risk factors include a higherthanexpected
domesticcoalproduction.
AdaniPower
Rating
CurrentMarketPrice
TargetPrice
BloombergCode
Reuterscode
Avg.Vol.(3m)(mn)
Avg.Val.(3m)(INRmn)
52wkH/L(INR)
MCAP(INRbn/USDbn)
JSWEnergy
Rating
CurrentMarketPrice
TargetPrice
BloombergCode
Reuterscode
Avg.Vol.(3m)(mn)
Avg.Val.(3m)(INRmn)
52wkH/L(INR)
MCAP(INRbn/USDbn)
NTPC
Rating
CurrentMarketPrice
TargetPrice
BloombergCode
Reuterscode
Avg.Vol.(3m)(mn)
Avg.Val.(3m)(INRmn)
52wkH/L(INR)
MCAP(INRbn/USDbn)
TataPowerCo.
Rating
CurrentMarketPrice
TargetPrice
BloombergCode
Reuterscode
Avg.Vol.(3m)(mn)
Avg.Val.(3m)(INRmn)
StockChart(RelativetoSensex)
MCAP
(INRbn/USDbn)
Valuations
ADANI
JSW*
NTPC
TPWR
Hold
3.79
2.09
Buy
208
8.2
10.4
8.2
160
81
Buy
JSWE.BO
50
240
82.49/1.56
46
JSWIN
79.9/35.8
NTPCIN
NTPC.BO
192/152
P/E(x)
10.3
91.3
138.11/2.61
ADANIIN
ADAN.BO
119/59.3
653
63
8.61
9.2
13.7 13.5
48.5 12.3
13.4 12.8
03/12f
363
1,318/24.89
EV/E(x)
03/13f03/12f
Add
103
118
TPWRIN
10.2 9.3
244.55
/
4.62
TTPW.BO
5.23
565
136/80.2
03/13f
6.8
23.5
Note:* For JSW, ratios for 03/12 are on actual
numbers.
AbhayMoghe,+9102266842857
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Utilities
2
Investmentsummary
Reforms that are necessary to rejuvenate Indias power sector may finally be undertaken in FY13. If left unchecked,
annuallossesofallstateleveldistributingcompaniesarelikelytoreach1.2%ofthegrossdomesticproduct(GDP).The
needtodefusealoomingcrisisthatcouldaffectseveralsectorswithintheeconomymaycatalyzeaseriesofstepsthat
canrestoretheviabilityofproducersandreducerisktolenderswithalowimpactonconsumers.Tariffhikesneedtobe
supplementedbymeasuresthatwouldensureasteadycoalsupplytothenewthermalgeneratingcapacityofc7GWat
a stable and reasonable price. Two elements in this effort are the supply from Coal India (COAL IN, Add) and
developmentofcaptivemines.Thebenefitsofsuchreformsandexpectedfirmingupofmerchanttariffs,are likelyto
improveearningsfromFY14.Evenwiththewellknownstress,theconsensusforecastsforthepowercompaniesFY13
and FY14 earnings growth exceed that of the Nifty. This is likely to preserve the premium in the P/E over the Nifty.
ProducerssuchasNTPC(NTPCIN,Buy)andTataPower(TPWRIN,Add)withahighproportionofrevenuesattariffthat
providepassthroughoffuelcostshavemorestableearnings.WeinitiatecoveragewithBuyratingsonNTPCandAdani
Power(ADANIIN),anAddratingonTPWRandHoldratingonJSWEnergy(JSWIN).
CompellingcasefornextphaseofreformsinFY13
Crisisinthepowersectorisreachingatippingpointwithdistributioncompanies(DISCOM)slosses,as
apercentage
of
the
nominal
GDP,
likely
to
reach
1.2%
by
Mar14f,
if
no
reforms
are
implemented.
Such
highlevellosses,asapercentageoftheGDP,wereearlierwitnessedinFY99FY02,whenkeyreforms
pertaining to the bailout of state electricity boards (SEBs) and formation of the Electricity Act were
initiated.Also,thepowersectorcrisismayimpactothersectorssuchasbanks.Ofthetotalloans,50%
loanstotheWIPcapacityand90%toDISCOMsare likelytobeatrisk.AsofDec11,thisamountwas
likelytobecINR1,627bn,i.e.,32%ofthebanks,PowerFinanceCorporation(POWFIN,Buy)andRural
ElectrificationCorporation (RECL IN,Buy)sexposure tothepowersectorthatfacesrisk.Asthe crisis
reaches a tipping point, the next set of reforms may be initiated, including: (1) permitting a pass
through of imported coal costs; (2) increase in tariffs by DISCOMs; and (3) approvals for already
allocatedcaptivecoalblocks.Signsofa likely initiationofthenextsetofreformsarevisiblewiththe
following: (1) submission of the Shunglu committees report addressing measures to improve
DISCOMsfinancialhealth;(2)removalofbasiccustomsdutyon importedcoal;and(3)directingCoal
India(COAL
IN,
Add)
to
sign
fuel
supply
agreements
(FSAs)
for
power
plants
commissioned
by
31Dec11.
Tariffislikelytogrowdoubledigits,butbreakevenmayneedmore
Tobridgethewidenednetgap,DISCOMsofkeystatesneedtoraisetariffsataCAGRof13%58% in
FY13fFY14f. However, the average realized rate (ARR) per unit is likely to have risen at a CAGR of
1.9%7.0%inFY08FY12f.ConsideringamaximumthreeyearCAGRofc11%inARRforUttarPradesh
overFY09FY11,weexpectDISCOMstobeabletoraisetheirARRbyaCAGRof11%inthenextthree
years.Whilethismayhelpreducelossesto0.8%ofthenominalGDPinFY14ffrom1.0%inFY12f,the
breakeven may need more. With a CAGR of 11% in ARR, it may take nine years to achieve PAT
breakeven. The 11% increase in power costs may impact the profits of companies in various sectors
suchasmanufacturing,textiles,automobilesetc.,byc2.5%,asperouranalysisoftherelevantgroupof
BSE500 companies. Some steps were taken by nonstate entities to compel DISCOMs to improve
financialhealth
such
as
preconditions
for
restructuring
loans
and
a
proposal
to
include
DISCOM
losses
intostategovernmentdeficitsaswellasaskingSERCsforasuomotoriseintariffs.
Hurdlestocaptiveminingliftingslowly;benefitsaftertwoyears
Thermal capacity of about 45GW was approved in 200610 with fuel linkage to undeveloped coal
reserves.Progressonthedevelopmentofthesecaptivemineshasbeenveryslow.Thebiggesthurdle
beingthego,nogopolicythathelduptheMinistryofEnvironmentsapproval.Inthelastsixmonths,
therehavebeensignsthatthepolicyislikelytoberemoved.Evenwiththis,coalextractionmayonly
begin after two years. Of the new capacity linked to captive mines, we estimate c7GW may be
completedinFY13andFY14;companiesmaybecompelledtooperatebybuyingcoalatmarketprices.
Crisisinthepowersector
isreaching
atipping
point
withdistribution
companies(DISCOM)s
losses,asapercentageof
thenominalGDP,likelyto
reach1.2%byMar14f,if
noreformsare
implemented.
The11%increaseinpower
costsmayimpactprofits
ofcompaniesinvarious
sectorsbyc2.5%
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SomeutilitiessuchasNTPCandTPWRarelikelytocommenceminingfromcaptiveminesinFY15f.As
perourestimates,capacityofc41GWmaybesupportedbycoalfromsuchcaptivemines.
ChangesunderwaytoexpandprofitabilityfromFY14f
The FY13f earnings of private utilities with large capacity in the pipeline are likely to remain under
pressureduetoINRdepreciationagainsttheUSDaswellashighinterestratesandimportedcoalcosts.
Larger and older companies such as NTPC and TPWR are relatively protected as a large part of their
revenuesfromPPAsareshieldedfromcostrises.However,theFY14fearningsofprivateutilitieswith
largepipelinesmayimproveduetothelikelygrowthinlowercostdomesticcoalsupplyandincreasein
merchant tariffs for a small period owing to the elections scheduled in 1H2014. Supply from COAL
wouldsupportanadditionalc10GWbytheendofFY14.Anotherdriverofprofitabilityislikelytobethe
firming up of merchant tariffs preceding the general elections due in 1H2014. The structural
improvementinprofitabilityarisingfromanticipatedreformsmaybevisibleafterFY14f.
HigherearningsgrowthmaypreservepremiumoverNifty
Consensus forecasts for the power companies FY13f and FY14f earnings growth exceed that of the
Nifty. This is likely to preserve the recent premium of the power index over the Nifty. The power
indexsrelativeunderperformancetotheNiftyreducedpaceinthequarterendingMar12comparedto
the five consecutive quarters, preceding the last quarter. The power index underperformed Nifty in
Apr12. Earlier underperformance may have been led by the significant drop in the yoy growth in
consensusPATforecastsofthepowerindexinFY12.Thisbroughtgrowthforecastslowerthanthatof
theNifty.OuranalysisindicatesthatwithachangeinmerchanttariffsandcoalavailabilityfromCOAL,
the RoEs may reflect significant variance from ADANI and JSWs base caseforecasts. However, NTPC
andTPWRsRoEsarelessexposedtoheadwindspertainingtocoalavailabilityandmerchanttariffsdue
to a large proportion of installed capacity under tariffs that enable passthrough of fuel costs. We
initiate coverage on NTPC (Buy, INR208), TPWR (Add, INR118), ADANI (Buy, INR81) and JSW (Hold,
INR46).Riskfactorsincludehigherthanexpecteddomesticcoalproductionandprojectdelays.
Exhibit1:CoalbasedcapacityfuelledbyCOAL
0
30
60
90
120
FY10 FY11 FY12f FY13f FY14f FY15f
40
55
70
85
100
GWof
coal
based
capacity
fuelled
by
Coal
India
%ofcoalbasedcapacityfuelledbyCoalIndia
Source:CEA,Company,AvendusResearch
Exhibit2:RelativeperformanceofpowerindextoNifty(%)
14.0
7.0
0.0
7.0
14.0
Jun10(3m) Dec10
(3m) Jun11
(3m) Dec11
(3m) Apr12
Source:Bloomberg,AvendusResearch.
Exhibit3:ValuationssummaryCMP TP Upside P/E(x) P/B(x) RoE(%)
(INR) (INR) (%) FY12f FY13f FY14f FY12f FY13f FY14f FY12f FY13f FY14f
NTPC 160 208 30 13.4 12.8 11.2 1.8 1.6 1.5 13.8 13.4 14.1
TPWR 103 118 14 13.7 13.5 17.4 1.7 1.6 1.5 12.6 12.1 8.6
ADANI 63 81 28 91.3 9.2 8.1 2.1 1.7 1.4 2.4 20.9 19.4
JSW* 50 46 9 48.5 12.3 9.6 1.4 1.3 1.2 3.0 11.3 13.2
Source:Company,Bloomberg,AvendusResearch. Note:*forJSWFY12numbersareactual
FY14fearningsofprivate
utilitieswithlarge
pipelinesmay
improve
duetothelikelygrowthin
lowercostdomesticcoal
supplyandincreasein
merchanttariffsfora
smallperiod
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TableofContents
Investmentsummary......................................................................................................................... 2CompellingcasefornextphaseofreformsinFY13 ..............................................................................2Tariffislikelytogrowdoubledigits,butbreakevenmayneedmore ...................................................2Hurdles
to
captive
mining
lifting
slowly;
benefits
after
two
years ........................................................2
ChangesunderwaytoexpandprofitabilityfromFY14f........................................................................3HigherearningsgrowthmaypreservepremiumoverNifty..................................................................3
CompellingcasefornextphaseofreformsinFY13 .......................................................................... 5DISCOMlosses,as%ofGDP,mayreachlevelsofFY9902 ..................................................................532%ofkeylendersexposuretopowersectorfacesarisk...................................................................5FY99FY02crisislikelytohaveledtosetofreformsearlier ..............................................................6nextsetofreformsmaycomeinascrisisreachestippingpoint........................................................6Signsarevisibleforlikelyinitiationofnextsetofreforms ...................................................................7
Tariffislikelytogrowdoubledigits,butbreakevenmayneedmore ............................................... 8KeystatesnetgapwidenedtouptoINR2.6/kwhinFY10 .................................................................8TariffCAGRof31%overFY13fFY14fneededtobridgegap ................................................................8Turnaround
may
get
delayed
due
to
lower
than
required
tariff
hikes .................................................9
Somestateshaveincreasedtariffsupto49%sinceApr10.................................................................10StepsinitiatedtocompelDISCOMstostreamlineoperations ............................................................10
Hurdlestocaptiveminingliftingslowly;benefitsaftertwoyears .................................................. 1259%ofWIPcapacityiscoalbasedwithnopassthroughofcostrise.................................................12Captivecoalminingtosupport41GWofWIPcapacity.......................................................................12Approvalsmaypickuppace;butbenefitstokickinfromFY15f.........................................................13
ChangesunderwaytoexpandprofitabilityfromFY14f .................................................................. 14MultiplefactorshaveledtolossesforpowerproducersinFY12f ......................................................14Increaseindomesticcoalavailabilityislikelytoimproveearnings ....................................................16MerchanttariffsmayproviderespiteinFY14f....................................................................................17EarningsgrowthlikelytoreviveinFY14f.............................................................................................19Reform
led
revival
in
earnings
may
start
after
FY14f..........................................................................20
Avendusforecastsvarybetween 31%and20%fromconsensus.......................................................20HigherearningsgrowthmaypreservepremiumoverNifty............................................................ 21
UnderperformanceofpowerindextoNiftycontinuesin2012 ..........................................................21Earningsgrowthlikelytohavebottomedout .....................................................................................21PowerindexmaycontinuetotradeatpremiumtoNifty ...................................................................22Mar14fcapacityunderfixedtariffslikelytobehighestforADANI.....................................................22RoEsofADANIandJSWexposedtomerchantratesandcoallinkages ..............................................23TargetpricebasedonDCFandSOTP ..................................................................................................23InitiatecoverageonNTPC,TPWR,ADANI,JSW...................................................................................24Riskfactors ..........................................................................................................................................25
Annexures........................................................................................................................................ 26Assumptions
for
calculating
banks
exposure
to
power
segments .....................................................26
ExposureofpowerproducerstokeyDISCOMs...................................................................................27ClassificationofWIPcapacity..............................................................................................................28Hierarchyofpreferredfuelsupplyandofftakecombinations...........................................................28Approvalsrequiredbeforecoalproductionbeginsatcaptivemine ...................................................28
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CompellingcasefornextphaseofreformsinFY13
Crisisinthepowersectorisreachingatippingpointwithdistributioncompanies(DISCOM)slosses,asapercentageof
thenominalGDP,likelytoreach1.2%byMar14f,ifnoreformsareimplemented.Suchhighlevellosses,asapercentage
oftheGDP,wereearlierreportedinFY99FY02,whenkeyreformspertainingtothebailoutofstateelectricityboards
(SEBs)andformationoftheElectricityActwereinitiated.Also,thepowersectorcrisismayimpactothersectorssuchas
banks.Ofthetotalloans,50%loanstotheWIPcapacityand90%toDISCOMsarelikelytobeatrisk.AsofDec11,this
amount was likely to be cINR1,627bn, i.e., 32% of the banks, Power Finance Corporation (POWF IN, Buy) and Rural
ElectrificationCorporation(RECLIN,Buy)sexposuretothepowersectorthatfacesrisk.Asthecrisisreachesatipping
point,thenextsetofreformsmaybeinitiatedthatmayinclude:(1)permittingapassthroughofimportedcoalcosts;
(2)increaseintariffsbyDISCOMs;and(3)approvalsforalreadyallocatedcaptivecoalblocks.Signsofalikelyinitiation
ofthenextsetofreformsarevisiblewiththefollowing:(1)submissionoftheShunglucommitteesreportaddressing
measures to improve the financial health of DISCOMs; (2) removal of basic customs duty on imported coal; and (3)
directing Coal India (COAL IN, Add) to sign fuel supply agreements (FSAs) for the power plants commissioned before
31Dec11.
DISCOMlosses,as%ofGDP,mayreachlevelsofFY9902
DISCOMlosses,
as
a
percentage
of
the
nominal
GDP,
have
increased
from
a
low
of
0.6%
in
FY06
to
0.9%
in FY10. Our estimates indicate that DISCOM losses are likely to have gone up to 1% of the nominal
GDPinFY12f.Ifnoreformsarecarriedout,DISCOMlosses,asapercentageofthenominalGDP,may
riseto 1.2%, asof Mar14f. Between FY99andFY02, SEB losses,as apercentage ofthe nominal GDP
surgedhighto1.2%1.5%.Duringthesameperiod,SEBswerebailedout;subsequently,theElectricity
Act2003andTariffPolicywereformulated.Ifreformsarenotimplemented,thetippingpointislikely
tobereachedbyMar14f.
Exhibit4:DISCOMlossesforeachfiscalyear,as%ofnominalGDP,forrespectivefiscalyear(%)
0.0
0.3
0.6
0.9
1.2
1.5
FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY14E
CLasa%ofNGDP CLasa%ofNGDPiftariffsnothiked CLasa%NGDPiftariffhiked
Source:RBI,PlanningCommission,FinanceCommission,AvendusResearch
32%ofkeylendersexposuretopowersectorfacesarisk
Banks, POWF, and RECL had outstanding loans of INR5,031bn to the power sector, as of Dec11. Of
these, cINR981bn in loans are likely to be for the working capital needs of generation companies as
well as to transmission companies for their capital expenditure and working capital needs. Installed
capacity is likely to owe cINR1,548bn in loans to banks, POWF and RECL. Out of the remaining
INR2,502bn, 50% of the loans to the WIP capacity and 90% to DISCOMs are likely to be at risk. This
amountiscINR1,627bn,i.e.,32%ofthebanks,POWFandRECLsexposuretothepowersector.Forthe
methodologyandassumptionspertainingtotheexposureofbankstovariouspowersegments,please
refertotheAnnexureonpage26.
Ifreformsarenot
implemented,thetipping
pointislikelytobe
reachedbyMar14f.
50%oftheloanstothe
WIPcapacityand90%to
DISCOMsarelikelytobe
atrisk.
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Exhibit5:Shareofvariouspowersegmentsinkeylendersexposuretopowersector(MW,%)
Installed Generation,
1,548,30%
WIP Generation,
1,564,31%
Transmission,850,
17%
Distribution,939,19%
WCloans,130,3%
Source:Company,RBI,POWF,RECL,AvendusResearch.
FY99FY02crisislikelytohaveledtosetofreformsearlier
TheFY99FY02crisisledtotheearliersetofreforms,includingthefollowing:(1)formulationofpolicy
onultramegapowerproject(UMPP)andcompetitivebidding;and(2)allocationofcaptivecoalblocks
totheprivatesector.Thishasboostedprivate investments, leadingtogrowth intheshareofprivate
independentpowerproducers(IPPs)ininstalledcapacityfrom10%,asofMar02,to20%,asofFeb12.
There has been asignificant rise in theWIP capacity ledby the private sector. Currently, 62%ofthe
WIP capacity is beingexecuted by private companies. Keyreforms for the improvement of theSEBs
financialhealthwere:
UnbundlingofSEBsanddivisionoftheiractivitiesintogeneration,transmissionanddistributionConstitutionofaregulatoryregimetodeterminetariffsUpgrades and reforms for the urban distribution network through the introduction of the
RestructuredAcceleratedPowerDevelopmentandReformsProgramme(RAPDRP)
Introduction of the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) along with measures toaddresstheneedsoftheruralsector
ComprehensivefinancingthroughPOWFandRECLtomeettheaboverequirementsStatusofreforms
Unbundling accomplished in most states; the constitution of Central Electricity RegulatoryCommission(CERC)andstateelectricityregulatorycommissions(SERCs)havebeenundertaken
Regulatoryregimeinplacetodeterminetariffs;however,irregularfilingoftariffpetitionshadledtomoredelayedandlowerincreaseintariffsthanrequired
PartBoftheRAPDRPschemetargetedtowarddistributioncompaniesisyettobeimplemented
nextsetofreformsmaycomeinascrisisreachestippingpoint
Asthecrisisreachestippingpoint,thenextsetofreformsislikelytobeimplemented;amongothers,
thesemayincludethefollowing:
Allowing passthrough of imported coal costs: Most private power producers have securedexclusive stakes in coal mines in Indonesia and Australia to supply fuel to power plants. The
electricitygeneratedfromthesepowerplantsistiedupunderpowerpurchaseagreements(PPAs)
Currently,62%oftheWIP
capacityisbeingexecuted
byprivatecompanies.
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withvariousDISCOMsanddonothavepassthroughof increase incosts.However,thechange in
theIndonesianmining lawandadditionaltaxes imposedonminers inAustraliahas ledtoarise in
costs, making PPAs economically unviable. Reforms allowing passthrough of rises in fuel costs is
likelytorestoretheeconomicviabilityofprivateinvestmentsintosuchprojects.Currently,c24GW
oftheWIPcapacityistiedupunderPPAsthatmayturnunviable.
IncreaseintariffsbyDISCOMs:BetterprofitabilityofDISCOMs,ledbytariffhikes,islikelytoboostpower
demand.
This
may
lead
to
an
improvement
in
merchant
tariffs.
The
untied
capacity,
which
variesbetween8%and65%,maygeneratehigherreturns.Thus,theviabilityofprivateinvestments
wouldberestored.
Approvals for captive coal blocks: Faster processing of regulatory approvals for captive mining islikelytoleadtoanearlystartofproductionatcaptivemines.Thismayleadtohigheravailabilityof
lowercostdomesticcoal.Higherproductionfromcaptivecoalblocksmayfreeupdemandforcoal
produced by COAL. Thus, power plant capacity tied up under PPAs and fuelled through imported
coalmayreducetheoperationalcostthroughoptimalblendingofdomesticandimportedcoal.
Signsarevisibleforlikelyinitiationofnextsetofreforms
Thenext
set
of
reforms
are
likely
to
be
initiated,
indicated
by
the
following:
(1)
the
submission
of
the
Shunglu committees report addressing measures to improve the financial health of DISCOMs; (2)
removal of basic customs duty on imported coal; and (3) directing COAL to sign FSAs for the power
plantscommissionedbefore 31Dec11.Key highlights ofthe ShunglucommitteesreportonDISCOMs
areasfollows:
To setupaspecial purposevehicle (SPV) to buyout distressed debts of banks to DISCOMs;about76%ofthesharecapitalintheSPVwouldbeownedbytheReserveBankofIndia(RBI),andtherest
by POWF and RECL. The RBI would provide a line of credit to the SPV for buying distressed debt
from banks. Repayment of loans would be rescheduled, after the state governments/DISCOMs
agreetopreconditionsontariffhikes,operationalparameters, interestrates,periodofrepayment
and amount of repayment on distressed loans. DISCOMs would then repay the debt to the SPV.
State
governments
would
also
have
to
give
an
undertaking
to
the
RBI
for
debiting
accounts,
in
case
ofadefaultonanSPV.
To streamline the processes for updating and auditing accounts at the earliest; the SERC isresponsible for assigning responsibility of regular tariff revisions. Thus, in an event of incomplete
accountsofDISCOMs,SERCsshouldundertaketheexerciseoftariffrevisionsuomoto.
Regionwiselossesshouldbecomputedwithinastate.Whilefixingtariffs,alosssurchargebasedontheconsumersofaregionwithT&DlossesmorethanthebenchmarkissuggestedbySERC.
Independence of regulators should be achieved through minimizing budgetary support. Also,individualsthathaveworkedwiththestategovernment intheprecedingfiveyearsshouldnotbe
eligibleforappointmentsinSERCs.
TheRAPDRPschemeshouldbeextendedtotownswithapopulationofmorethan30,000,asperthecensusreportin2011.Thewidespreadinstallationofelectronicmeters,meterreadingthroughautomatichandheldmeteringdevices,automaticbillingprocesses,suitabletariffsacrosscategories
of consumers and proper collection are suggested for the sustainable maintenance of assets
createdthroughincrementalinvestments.
The distribution franchisee model would be extended to c255 towns with cumulative powerconsumptionofmorethan40%.
Shunglucommittees
reportissubmittedthat
addressesmeasuresto
improvethefinancial
healthofDISCOMs
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Tariffislikelytogrowdoubledigits,butbreakevenmayneedmore
To bridge the widened net gap, DISCOMs of key states need to raise tariffs at a CAGR of 13%58% in FY13fFY14f.
However, the average realized rate (ARR) per unit is likely to have risen at a CAGR of 1.9%7.0% in FY08FY12f.
ConsideringamaximumthreeyearCAGRofc11%inARRforUttarPradeshoverFY09FY11,weexpectDISCOMstobe
able to raise their ARR by a CAGR of 11% in the next three years. While this may help reduce losses to 0.8% of the
nominalGDPinFY14ffrom1.0%inFY12f,thebreakevenmayneedmore.WithaCAGRof11%inARR,itmaytakenine
years to achieve PAT breakeven. The 11% increase in power costs may impact the profits of companies in various
sectorssuchasmanufacturing,textiles,automobilesetc.,byc2.5%,asperouranalysisoftherelevantgroupofBSE500
companies. Some steps were taken by nonstate entities to compel DISCOMs to improve financial health such as
preconditionsforrestructuringloansandaproposaltoincludeDISCOMlossesintostategovernmentdeficitsaswellas
askingSERCsforasuomotoriseintariffs.
KeystatesnetgapwidenedtouptoINR2.6/kwhinFY10
Netgap,i.e.,thedifferencebetweenrevenueperunitpurchasedandcostperunitpurchased,roseup
to INR2.6/kwh in key states, which contributed 103% of losses in FY07FY10. These states include
Rajasthan, Tamil Nadu, Andhra Pradesh, Madhya Pradesh, Haryana, Uttar Pradesh, Punjab and
Maharashtra.The
gap
comprises
subsidy
realized
and
revenue
realized
(due
to
increase
in
debtors).
ThewidestgapwasRajasthans,whichincreasedtoINR2.6/kwhinFY10fromINR0.2/kwhinFY07.The
least gap was Maharashtras at INR0.2/kwh. In FY07FY10, the gap widened most for Rajasthan by
INR2.4/kwh,followedbyTamilNaduatINR1.3/kwh.PunjabsgapnarrowedINR0.2/kwhinFY07FY10.
Exhibit6:NetgapforkeystatesoverFY07FY10(INR/kwh)
0.1
0.5
0.2
1.1
0.00.3
0.5
0.20.3 0.3
0.7
1.1
0.0
0.6 0.7
0.2
0.5
1.8
1.2
0.9
1.2 1.3
0.50.5
2.6
1.3
0.7
1.5
1.1
0.20.30.3
0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Haryana Punjab Rajasthan Uttar
Pradesh
Andhra
Pradesh
TamilNadu Madhya
Pradesh
Maharashtra
FY07 FY08 FY09 FY10
Source:POWF,AvendusResearch
TariffCAGRof31%overFY13fFY14fneededtobridgegap
The net gap in key states can be bridged by increasing an average tariff at a CAGR of 13%58% in
FY13fFY14f,and
reducing
aggregate
technical
and
commercial
(AT&C)
losses.
Lowering
AT&C
losses
mayraiserevenuesduetogrowthinbillableunits.WeestimatedtherequiredCAGRintariffswiththe
followingassumptionsforDISCOMsfromeightkeystates:
IncreaseinunitspurchasedataCAGRof7.5%overFY11fFY14fReductioninAT&Clossesby1%perannumoverFY11fFY14fRiseinpowerpurchasecostsataCAGRof7.5%overFY11fFY14fHikeinotheroperatingandadministrativecostsataCAGRof12%overFY11fFY14f
Thewidestgapwas
Rajasthans,which
increasedtoINR2.6/kwh
inFY10
from
INR0.2/kwh
inFY07.
Thenetgapinkeystates
canbebridgedby
increasinganaverage
tariffataCAGRof13%
58%inFY13fFY14f
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Capital expenditure per year over FY11fFY14f similar to that incurred in FY10; loss estimatesexcludeanysubsidyrealizationsfromstategovernments
Exhibit7:CurrentARR(INR/kwh),requiredARR(INR/kwh)inkeystates,asofFY10
0.0
1.0
2.0
3.0
4.0
5.0
Haryana Punjab Rajasthan Uttar
Pradesh
Andhra
Pradesh
TamilNadu Madhya
Pradesh
Maharashtra
CurrentARR Required
ARR
Source:POWF,AvendusResearch
Turnaroundmaygetdelayedduetolowerthanrequiredtariffhikes
FortheDISCOMsoftheeightkeystates,ARRislikelytohaverisenataCAGRof1.9%7.0%overFY08f
FY12f.ConsideringamaximumthreeyearCAGRofc11%inARRforUttarPradeshoverFY09FY11,we
expectDISCOMstobeabletoraisetheirARRbyaCAGRof11%overthenextthreeyears.Whilethis
may help reduce losses, the PAT breakeven may further get delayed. With a CAGR of 11% in ARR, it
maytakenineyearstoachievethePATbreakeven.
Exhibit8:ARRofkeystates,andthreeyearandfiveyearCAGRinARRforthesekeystatesAveragerevenuerealized(INR/kWh)
FY07 FY08 FY09 FY10 FY11e FY12e
CAGR
FY08FY12(%)
Maximumthreeyear
CAGR(%)
Periodfor
maximumthreeyear
CAGR
Haryana 2.0 2.1 2.4 2.6 2.6 2.6 6.3 10 FY08FY10
Punjab 2.0 2.0 2.3 2.2 2.2 2.4 3.9 4 FY08FY10
Rajasthan 2.2 2.2 2.4 2.2 2.2 2.8 4.9 5 FY10FY12
UttarPradesh 1.8 1.9 2.0 2.3 2.6 2.6 7.0 11 FY09FY11
AndhraPradesh 2.2 2.4 2.3 2.4 2.6 2.6 3.5 4 FY08FY10
TamilNadu 2.4 2.5 2.4 2.4 2.7 2.7 1.9 3 FY10FY12
MadhyaPradesh 2.1 2.0 2.1 2.4 2.4 2.5 4.3 7 FY09FY11
Maharashtra 2.6 2.7 3.1 3.4 3.4 3.5 6.2 9 FY08FY10
Source:POWF,SERCs,Mediareports,AvendusResearch
11%annual
increase
in
tariffs
may
dent
industry
profits
by
up
to
2.5%
Exhibit9:Impactofincreaseinelectricitytariffsby11%onfinancialsofasectionofBSE500companiesFY11Actual(INRbn) FY11Posttariffhikeof11%(INRbn) Variance(%)
Sales 24,876 24,876 0
Powerandfuelcosts 539 598 11.0
EBITDA 3,749 3,690 1.6
Interestcosts 682 682 0.0
PAT 1,726 1,682 2.5
PATmargin 6.9% 6.8% 18bp
Source:Prowess,AvendusResearch
FortheDISCOMsofthe
eightkeystates,ARRis
likelytohaverisenata
CAGRof1.9%7.0%over
FY08fFY12f.
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Tariff hikes of 11% by DISCOMs for the industry is likely to dent profits by up to 2.5%. We have
analyzed the power and fuel costs of BSE500 companies, excluding companies operating in sectors
such as financial, oil & gas, IT services and power. Power and fuel costs for the selected set are
cINR539bn,whichis2.2%ofsales.An11%increaseinpowerandfuelcostsislikelytoleadtoarisein
power and fuel expenses by INR59bn as well as a reduction in profits by INR44bn, implying a 2.5%
impactonprofitability.However,anycuts inthe interestratesmayhelpoffsetthe increase inpower
andfuelcosts.Interestcostswere2.7%ofsalesinFY11.
Somestateshaveincreasedtariffsupto49%sinceApr10
Manystateshavehikedelectricitytariffsbetween1%and49%sinceApr10.Whilethequantumofthe
riseintariffsislowerthanneededinsomecases,respectiveSERCsinthetarifforderofsomeDISCOMs
have taken cognizance of the gap; the gap is likely to be bridged in a phased manner. One such
exampleisRajasthan.TheRajasthanElectricityRegulatoryCommission(RERC)agreedthattherevenue
gapisc50%.However,thetariffwasraised23%andislikelytobehikedinaphasedmannertobridge
thegapsothatconsumersarenotburdenedwithsuddentariffhikes.
Exhibit10:StatewisetariffhikesimplementedsinceApr10State
Tariff
hike
(%)
Effective
date
AndhraPradesh 7 Aug10
Bihar 11 Jun11
Bihar 12 Apr12
Chhattisgarh 14 Apr11
Delhi 22 Aug11
Gujarat 4 Sep11
Haryana 1 Aug11
HimachalPradesh 9 Aug11
Jharkhand 19 Aug11
MadhyaPradesh 6
MadhyaPradesh 7
Maharashtra 5
Punjab 9 May11
Rajasthan
23
FY12TamilNadu 9 1Aug10
TamilNadu 37 Apr12
UttarPradesh 13 1Apr10
Uttarakhand 5
WestBengal 9
Source:SERCs,DISCOMs,Mediareports,AvendusResearch
StepsinitiatedtocompelDISCOMstostreamlineoperations
Thecentre,alongwithvariousministries,theRBIandlenders,haveeithertakeninitiativesorproposed
to take some to compel DISCOMs to streamline operations and improve financial health. The steps
such as restricting lending, preconditions for restructuring loans and proposals to include DISCOM
lossesintostategovernmentdeficitsarelikelytocompelthestategovernmenttoimplementDISCOM
relatedreforms.Otherinitiativessuchasappointingdistributionfranchisees,passthroughoffuelcost
risetoconsumers,timelyfilingoftariffpetitionsandasuomotoincreaseoftariffsbySERCsarelikely
to enhance the profitability of DISCOMs. Some key initiatives and their likely impact are outlined in
Exhibit 8 below. Additionally, the Shunglu committee has submitted a detailed plan to address the
financialhealthofDISCOMs(detailsonpage7).
Tariffhikesof11%by
DISCOMsfortheindustry
islikelytodentprofitsby
upto2.5%.
Thecentre,alongwith
variousministries,theRBI
andlenders,haveeither
takeninitiativesor
proposedto
take
some
to
compelDISCOMsto
streamlineoperationsand
improvefinancialhealth.
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Exhibit11:Controllingmeasuresthroughstateandnonstateentities,andtheirlikelyimpactControllingmeasure Likelyimpact
Staterelatedfactors
Resolutionbystatepowerministers
Regular
filing
of
tariff
petitions
Timely
tariff
hikes
AT&Clossestobereducedtounder15% Improvedprofitability
Appointmentofdistributionfranchisee Enhancedprofitability
Automaticpassthroughoffuelcostriseintothetariffs Sustainableprofitability
Stategovernmenttoclearalloutstandingsubsidiesandensure
advancepaymentofsubsidiesinthefuture
Improvementincashflowsleadingtolower
requirementofworkingcapitalloans
Loans,extendedbystategovernments,tobeconvertedintoequityBettercapitalstructure,enhancingborrowing
capacity
Non statefactors
RestrictinglendingtoDISCOMs Increasedfocusonimprovingoperatingcashflows
Preconditionsoffilingtariffpetitionsforrestructuringloans Timelytariffhikes
ProposaltoincludeDISCOMlossesinstatefiscaldeficitsLimitingtheborrowingofthestategovernment,
thereby
enhancing
political
will
to
implement
reformsTribunalorderonSERCtoincreasetariffonsuomotobasis Timelytariffhikes
Source:PublicInformationBoard,Mediareports,AvendusResearch
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Hurdlestocaptiveminingliftingslowly;benefitsaftertwoyears
Thermal capacity of close to 45GW was approved during 200610 with fuel linkage to undeveloped coal reserves.
Progressonthedevelopmentofthesecaptivemineshasbeenveryslow.Thebiggesthurdlehasbeenthego,nogo
policy,whichhelduptheMinistryofEnvironmentsapproval.Overthelastsixmonths,therehavebeensignsthatthis
policyislikelytoberemoved.Evenwiththechange,coalextractionmayonlybeginaftertwoyears.Ofthenewcapacity
linked to captive mines, we estimate c7GW may be completed in FY13 and FY14; companies may be compelled to
operate by buying coal at market prices. Some utilities such as NTPC and TPWR are likely to commence mining from
captiveminesinFY15f.Ourestimatessuggestthatnewcapacityof41GWmayeventuallybesupportedbycoalfrom
suchcaptivemines.
59%ofWIPcapacityiscoalbasedwithnopassthroughofcostrise
Out of the coalbased WIP capacity of 95GW, 31% is being executed by central and state utilities.
Power generated by central and state utilities is sold on a costplus basis to DISCOMs. Out of the
remaining69%capacityexecutedbyprivatecompanies,59%doesnothaveacostpassthrough.This
includescapacitytiedupunderPPAsandpowertobesoldonmerchantbasis.
Exhibit12:ShareofWIPcapacityonownershipbasisandoptionofcostpassthrough(%)Central
14%
State
17%
Private CPT*
10%
Private no CPT*
59%
Source:Company,CEA,SERC,AvendusResearch. Note:*Costpassthrough
Captivecoalminingtosupport41GWofWIPcapacity
Exhibit13:SchemewiseWIPcoalbasedcapacitybasedondifferentsourcesofcoal(MW)(MW) COAL Captive Imported Total
Central 3,107 8,000 2,643 13,750
State 1,015 15,625 0 16,640
Private 24,082 17,045 23,582 64,708
Total
28,204 40,670 26,225
95,098
Source:Company,CEA,AvendusResearch
Captiveminingcansupport41GWoftheWIPcapacity.Wehaveconsideredcoalproductionin50%of
theallocatedcaptivemines.Furthermore,ourassumptionincludesproductionperannumat80years
forthecurrentreservesuntiltheyexhaust.Outofthetotalcaptiveminesallocated,stateutilitiesare
allocated with a majority of mines. These mines are likely to support the WIP capacity of c16GW.
Amongcentralentities,NTPCislikelytostartproductionatPakriBarwadihin24months.Anothermine
ChhatiBariatuhasgotregulatoryapprovalsuntilforestclearancestageI.Thecoalminesallocatedto
NTPCandDVCconstitutetotalreservesofc7bntonnes.
OutofthecoalbasedWIP
capacityof95GW,31%is
beingexecutedbycentral
andstateutilities.
Outofthetotalcaptive
minesallocated,state
utilitiesareallocatedwith
amajorityofmines.
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Approvalsmaypickuppace;butbenefitstokickinfromFY15f
BenefitsfromanincreaseincoalproductionfromcaptiveminesarelikelytokickinfromFY15f.NTPCs
captive mine Pakri Barwadih and TPWRs captive mine Tubed are likely to commence production in
FY15f.Fortheremainingcaptiveminesofpowerproducers,thepaceofregulatoryapprovalsarelikely
topickupwiththegovernmentsfocusonraisingproductionfromcaptivemines.Afterthechangein
theMinisterofEnvironmentandForest(MoEF)fromMr.JairamRameshtoMs.JayanthiNatarajan,the
nogo
policy
was
removed.
The
first
such
indication
is
the
media
report
of
the
letter
to
Essar
Energy
from the Ministry of Power to seek forest clearances from MoEF for the Mahan coal block. The coal
blockwasearliermarkedunderthenogoarea.Followingallregulatoryapprovals,itislikelytotakeat
least two years to begin production from captive mines. Land acquisition may take c12 months,
whereas it would take another 12 months to commence production. Hence, we expect production
fromcaptiveminestostartfromFY15f.
NTPCscaptiveminePakri
BarwadihandTPWRs
captivemineTubedare
likelytocommence
productioninFY15f.
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ChangesunderwaytoexpandprofitabilityfromFY14f
TheFY13fearningsofprivateutilitieswithlargecapacityinthepipelinearelikelytoremainunderpressureduetoINR
depreciationagainsttheUSDaswellashighinterestratesandimportedcoalcosts.Largerandoldercompaniessuchas
NTPC and TPWR are relatively protected as a large part of their revenues from PPAs are shielded from cost rises.
However,theFY14fearningsofprivateutilitieswithlargepipelinesmayimproveduetothelikelygrowthinlowercost
domesticcoalsupplyand increase inmerchanttariffs fora smallperiodowingtotheelections scheduled in 1H2014.
SupplyfromCOALwouldsupportanadditionalc10GWbytheendofFY14.Anotherdriverofprofitabilityislikelytobe
the firming up of merchant tariffs preceding the general elections due in 1H2014. The structural improvement in
profitabilityarisingfromanticipatedreformsmaybevisibleafterFY14f
MultiplefactorshaveledtolossesforpowerproducersinFY12f
Power producers have incurred losses due to multiple factors such as muted merchant tariffs, high
importedcoalcosts,currencyfluctuationsandhighinterestrates.
Operationrelatedfactorsposingthreattoneartermearnings
Muted merchant tariffs: Average merchant tariffs have declined from a high of INR7.8/kwh inApr10
to
INR3.9/kwh
in
Sep11.
Between
Apr10
and
Sep11,
merchant
tariffs
touched
a
minimum
of
INR2/kwh.Forthe lastoneyear,merchanttariffshavestabilizedatcINR4/kwhforbilateraltrades
and cINR3/kwh at the power exchanges, i.e., Indian Energy Exchange (IEX) and Power Exchange
India LImited (PXIL). A 10% decrease in merchant tariffs (for 100% merchant capacity) impacts
earningsofa1,000MWimportedcoalbasedpowerplantoperatingat80%PLFby27%.
Exhibit14:Shorttermpriceforelectricitytradedthroughbilateraltrade,IEXandPXIL(INR/kwh)
0
2
4
6
8
Apr10 Aug10 Nov10 Mar11 Jul11 Oct11 Feb12
Bilateral IEX PXIL
Source:CERC,AvendusResearch
Highimportedcoalcosts:Globallycoalpriceshave increased65%sinceApr09.SouthAfricancoalpriceshavefollowedasimilartrendasAustraliancoalprices.Australiancoalpriceshavereflecteda
sharp
rise
during
Jan07May08
and
Feb09Mar11.
Increased
dependence
on
imported
coal
and
rising coal prices worldwide are likely to lead to higher fuel costs. A 10% increase in the price of
importedcoal impactsearningsofa1,000MW importedcoalbasedpowerplantoperatingat80%
PLFby7.5%.
A10%decreasein
merchanttariffs
(for
100%
merchantcapacity)
impactsearningsofa
1,000MWimportedcoal
basedpowerplant
operatingat80%PLFby
27%.
Globallycoalpriceshave
increased65%sinceApr09
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Exhibit15:Globalmonthlyaveragecoalprices(FOBbasis)forSouthAfricaandAustralia(USDperton)
50
100
150
200
Jan07 Nov07 Sep08 Aug09 Jun10 Apr11 Mar12
Australia SouthAfrica*
Source:InternationalMonetaryFund,Bloomberg,AvendusResearch.Note:*MonthlyaverageforSouthAfricancoalprice
UnviablePPAs:MostcaseIbiddingthatwasexecuteduntilDec09werebelowINR3.25/kwh.Undercase
I
bidding,
risks
pertaining
to
execution
of
projects,
fuel
availability
and
more
lies
with
the
project developer. Between 2006 and 2009, the case I bids were bagged at an average levelized
tariff of INR2.83/kwh, excluding UMPP. A majority of these PPAs are expected to begin between
Feb12andAug14.Duetounavailabilityofcheapfuel,PPAsarelikelytohavebecomeunviable.
Exhibit16:CapacitytiedupthroughPPAbyrespectivestatesandthelevelizedtariff
0
850
1700
2550
3400
GJ2006 HR2007 MP2007 MH2008 MH2009 BH2009 RJ2009 KK2010
2.00
2.50
3.00
3.50
4.00
Capacity(MW;LHS) LevelisedTariff(INR/kwh)
Source:Company,SERCs,Mediasources,AvendusResearch
Macroeconomicfactorsposingrisktoneartermearnings
Currencymovements: The increase in costspertainingto capexand fuelrelated payables c21%depreciation
of
the
INR
against
the
CNY
and
c19%
depreciation
of
the
INR
against
USD
between
Jul11 and Dec11 is likely to raise the cash outgo for BTG equipment and coal imports. For a
1,000MW imported coalbased power plant operating at 80% PLF, a 1% depreciation of the INR
againstCNYandUSDcouldleadtoa1%decreaseinprofits.
Between2006and2009,
thecase
Ibids
were
baggedatanaverage
levelizedtariffof
INR2.83/kwh
Fora1,000MWimported
coalbased
power
plant
operatingat80%PLF,a
1%depreciationofthe
INRagainstCNYandUSD
couldleadtoa1%
decreaseinprofits.
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Exhibit17:CrosscurrencyrateforINR/USD(x)
42
45
48
51
54
Apr11 Jul11 Oct11 Jan12 Apr12
INR/USD
Source:Bloomberg
Exhibit18:CrosscurrencyrateforINR/CNY(x)
6.5
7.0
7.5
8.0
8.5
Apr11 Jul11 Oct11 Jan12 Apr12
INR/CNY
Source:Bloomberg
Higherinterestcosts:RBIhascutthereporateby50bpinApr12afterraisingitby350bpbetweenApr10 and Mar12. Since Mar10, State Bank of India (SBIN, Buy) benchmark prime lending rate
(BPLR)washikedfrom11.75%to14.75%,a300bpincreaseAriseof100bpininterestcostsislikely
toimpactprofitsfora1,000MWimportedcoalbasedpowerplantoperatingat80%PLFby1%.
Exhibit19:RBIreporateandSBIBPLR(%)
3.0
4.2
5.4
6.6
7.8
9.0
Apr09 Oct09 Mar10 Aug10 Jan11 Jun11 Nov11 Apr12
11
12
13
14
15
16
RBIReporate(%) SBIBPLR(%;RHS)
Source:Bloomberg
Increaseindomesticcoalavailabilityislikelytoimproveearnings
Production of COAL may rise 5% yoy in FY13f and FY14f. This would imply an incremental thermal
coalavailabilityofc36MToverFY13fFY14f.PresidentialdirectivehadbeenissuedtoCOALforsigning
FSAswithpowerproducers.Followingarethekeydirectivesissued:
COALwillsignFSAswithpowerplantsthathaveenteredintolongtermPPAswithDISCOMsandarecommissionedbefore31Mar15
FSAshouldbesignedforthefullquantityofcoalmentioned inthe letterofassurance(LoA)for aperiodof20years
Trigger levels for disincentives would be 80% of the FSA quantity and would be 90% of the FSAquantityforincentives
Any shortfall in fulfilling commitments as per the FSA has to be met through either imports orsuppliesfromothercentralorstatePSUsthathavebeenallocatedcoalblocks
Ariseof100bpininterest
costsislikelytoimpact
profitsfora1,000MW
importedcoalbased
powerplantoperatingat
80%PLFby1%.
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PPAsaresignedwithDISCOMsforacapacityofc28GW.ThesepowerproducershavesignedLoAs/FSAs
with COAL for the same generation capacity, which is likely to be operational by 31Mar14f.
Incremental production by COAL is likely to support c7GW of power plant capacity. While the
proportionofthecoalbasedcapacityfuelledbyCOAL is likelytoreducefrom83% inFY11to70% in
FY15f,the installedcapacityfuelledbyCOAL is likelyto increasec25GWoverFY11FY14f.Thus,with
more domestic coal available, the earnings of power producers are likely to improve. ADANI has
approved
coal
linkages
of
c12MT
for
its
power
plants
out
of
c9GW;
part
of
this
is
already
commissioned.
Exhibit20:AbsoluteandproportionofcoalbasedcapacityfuelledbyCOAL
0
40
80
120
FY10 FY11 FY12f FY13f FY14f FY15f
60
70
80
90
GWofcoalbasedcapacityfuelledbyCoalIndia %ofcoalbasedcapacityfuelledbyCoalIndia
Source:Company,AvendusResearch
MerchanttariffsmayproviderespiteinFY14f
The topsix buyers of merchant power have been DISCOMs in Tamil Nadu, Punjab, Rajasthan, Uttar
Pradesh,HaryanaandMaharashtra.Fiveofthesebuyershavehadhighercashlossescomparedtothe
respectivegrossstatedomesticproduct(GSDP)inMar10f.Reductioninannuallossesledbytariffhikes
mayenable
DISCOMs
buying
more
merchant
power
at
competitive
tariffs.
Exhibit21:Shorttermpriceforelectricitytradedthroughbilateraltrade,IEXandPXI(INR/kwh)
0
4
8
12
Oct08 May09 Dec09 Jun10 Jan11 Jul11 Feb12
Bilateral IEX PXI
Source:CERC,AvendusResearch
Incrementalproductionby
COALislikelytosupport
c7GWofpowerplant
capacity.
Thetopsixbuyersof
merchantpowerhave
beenDISCOMsinTamil
Nadu,
Punjab,
Rajasthan,
UttarPradesh,Haryana
andMaharashtra.
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StrongdemandinthemonthsprecedingelectionsState assembly elections were held in Apr11May11 and Jan12Feb12. Merchant tariffs preceding
elections had either led to a decrease in the yoy fall in merchant tariffs (in Mar11) or yoy rise in
merchanttariffsbyupto18%(inDec11).Totalsalesthroughshorttermtradesincreased13%yoyin
Mar11and64%yoyinDec11.
Exhibit22:Averagemerchanttariff,volumesandsalesandyoychangepreceding1H2011electionsAverage
merchant
tariff
Total
merchant
volumes
Total
merchant
sales
(INR/kwh) Yoychange(%) (MU) Yoychange(%) (INRmn) Yoychange(%)
Oct10 3.60 28 3,776 11 13,608 21
Nov10 3.44 28 3,687 17 12,701 16
Dec10 3.51 25 4,063 16 14,254 13
Jan11 3.84 21 4,702 26 18,057 0
Feb11 4.16 11 4,622 32 19,248 18
Mar11 4.35 14 5,011 31 21,814 13
Apr11 4.44 27 5,304 59 23,575 15
May11 4.11 30 5,215 35 21,424 6
Jun11 3.59 31 5,513 14 19,806 21
Source:CERC,AvendusResearch
Exhibit23:Averagemerchanttariff,volumesandsales,andyoychangepreceding1H2012electionsAveragemerchanttariff Totalmerchantvolumes Totalmerchantsales
(INR/kwh) Yoychange(%) (MU) Yoychange(%) (INRmn)) Yoychange(%)
Apr11 4.44 27 5,304 59 23,575 15
May11 4.11 30 5,215 35 21,424 6
Jun11 3.59 31 5,513 14 19,806 21
Jul11 3.75 20 7,574 40 28,402 13
Aug11 3.71 18 7,451 34 27,659 9
Sep11 3.74 10 6,210 36 23,218 22
Oct11 4.57 27 4,526 20 20,675 52
Nov11 4.24 23 4,689 27 19,881 57
Dec11
4.14 18 5,639 39
23,370 64Jan12 4.20 10 5,521 17 23,243 29
Source:CERC,AvendusResearch
PLFsofmerchantpowerplantsimprovedbeforeelectionsTheplantloadfactors(PLFs)ofkeypowerplantsthatselltheirelectricityproducedthroughmerchant
trade have improved during the months preceding the elections. The yoy improvement has been a
maximum of 10bp for the aggregate capacity in Mar11. Plantwise, JSWs Ratnagiri plant reflected a
92bp rise in Apr11. The proportion of units generated by power plants, as a percentage of total
merchanttradevolumes,wasc52%inDec11.
Exhibit24:YoychangeinPLFsofcoalbasedmerchantpowerplants(bp)Plantname Company Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jul11 Aug11 Sep11 Oct11 Nov11 Dec11 Jan12
OP
JINDAL
TPS
JSP
0 3 93
6 3 15
9
4
2 2
2
12
PATHADITPP LANCI 3 22 21 5 5 14 24 16 6 6 15 14 3
TORANGALLU
TPS(SBUI)
JSW
8 1 3 1 2 16 6 4 19 32 11 8 2
ROSATPPPhI RPWR 78 78 49 16 16 56 58 17 30 1 41 6 25
JSWRATNAGIRI
TPP
JSW
77 93 78 92 44 68 78 60 23 1 18 18 5
Total 5 6 10 3 13 3 2 8 5 7 9 2 6
Source:CEA,AvendusResearch
Totalsalesthroughshort
termtradesincreased13%
yoyinMar11and64%y
oyinDec11.
Theplantloadfactors
(PLFs)ofkeypowerplants
thatselltheirelectricity
producedthrough
merchanttradehave
improvedduringthe
monthsprecedingthe
elections.
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Elections: The general assembly elections due in 2014 and a significant number of state assembly
electionsover20122014are likelytokeeptheshorttermdemandforpowerbuoyant.Aswitnessed
in1H2009,merchanttariffstendtorisebeforeelections.
Exhibit25:Likelyscheduleofstateassemblyelectionsover201220142012 2013 2014
Goa Chhattisgarh AndhraPradesh
Gujarat JammuandKashmir ArunachalPradesh
HimachalPradesh Karnataka Haryana
Manipur MadhyaPradesh Jharkhand
Punjab Meghalaya Maharashtra
UttarPradesh Mizoram Orissa
Uttarakhand Nagaland Sikkim
NCTofDelhi
Rajasthan
Tripura
Source:www.indianelection.com,AvendusResearch.
EarningsgrowthlikelytoreviveinFY14f
Earningsgrowth
is
likely
to
revive
in
FY14f
due
to
the
likely
growth
in
lower
cost
domestic
coal
supply
and increase in merchant tariffs for a small period owing to the elections scheduled in 1H2014. The
Dec11consensus forecastsfor ADANIandJSW indicate a44%and18%yoygrowth,respectively, in
FY14fearnings.
Exhibit26:ConsensusEPSforecastsofFY13andFY14forADANI
0
5
10
15
20
25
4QFY10 2QFY11 4QFY11 2QFY12 4QFY12
5
5
15
25
35
45
FY13EPS FY14EPS FY14/FY13chg(%;RHS)
Source:Bloomberg,AvendusResearch
Exhibit27:ConsensusEPSforecastsofFY13andFY14forJSW
0
3
6
9
12
15
4QFY10 2QFY11 4QFY11 2QFY12 4QFY12
40
28
16
4
8
20
FY13EPS FY14EPS FY14/FY13chg(%;RHS)
Source:Bloomberg,AvendusResearch
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ReformledrevivalinearningsmaystartafterFY14f
Keyreformsthatmaybeexecutedintheneartermareasfollows:(1)regulatoryapprovalsforalready
allocatedcaptivemining;(2)tariffhikesbyDISCOMsleadingtoimprovementintheirfinancialhealth;
and(3)permittingpassthroughofhigherfuelcostsduetouseofimportedcoal(forplantspoweredby
importedcoal).ThereformsarelikelytoenhanceprofitabilityandRoEs.However,thesereformsmay
take more than 18 months to influence earnings. Hence, revival in earnings growth is likely to begin
afterFY14f.
Exhibit28:Reformsrequired,timetakenforpositivechangeandimpactSegment Reforms Timetakenforpositivechange Impact
DISCOMTariffhikesleadingtoimprovement
inprofitabilityMorethan18months
Increaseindemandforpowerat
competitivetariffs
DomesticcoalRegulatoryapprovalsforcaptive
coalminesMorethan24months
Betteravailabilityofcheaperfuel
leadingtobetteroperatingmargins
ImportedcoalAllowingpassthroughofchangein
importedcoalprices
Dependinguponthe
implementationtoearlierPPAsor
just
the
future
PPAs
Highervisibilitytoreturnon
investments
Source:AvendusResearch
Avendusforecastsvarybetween 31%and20%fromconsensus
AvendusestimatestheFY13fandFY14fPATforNTPC,TPWR,ADANIandJSWtovaryfromconsensus
forecasts between 31% and 20%. Our PAT projections are higher than consensus forecasts for JSW.
However,theseforecastsaresignificantlylowerthantheconsensusforecastsforTPWR.
Exhibit29:AvendusandconsensusPATforecastsandvariance(INRmn) NTPC TPWR ADANI JSW
FY13f FY14f FY13f FY14f FY13f FY14f FY13f FY14f
Avendusforecasts 103,389 117,465 18,177 14,047 15,011 17,084 6,719 8,573
Consensusforecasts 104738 120291 20,498 20,435 12,470 20,952 6,320 7,630
Variance(%) 1 2 11 31 20 18 6 12
Source:Company,Bloomberg,AvendusResearch
Thereformsarelikelyto
enhanceprofitabilityand
RoEs
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HigherearningsgrowthmaypreservepremiumoverNifty
ConsensusforecastsforthepowercompaniesFY13fandFY14fearningsgrowthexceedthatoftheNifty.Thisislikelyto
preservetherecentpremiumofthepower indexovertheNifty.Thepower indexsrelativeunderperformancetothe
NiftyreducedpaceinthequarterendingMar12comparedtothefiveconsecutivequarters,precedingthelastquarter.
ThepowerindexunderperformedNiftyinApr12.Earlierunderperformancemayhavebeenledbythesignificantdrop
intheyoygrowth inconsensusPATforecastsofthepower index inFY12.Thisbroughtgrowthforecasts lowerthan
thatoftheNifty.OuranalysisindicatesthatwithachangeinmerchanttariffsandcoalavailabilityfromCOAL,theRoEs
mayreflectsignificantvariancefromADANIandJSWs basecase forecasts.However,NTPCandTPWRsRoEsare less
exposedtoheadwindspertainingtocoalavailabilityandmerchanttariffsduetoalargeproportionofinstalledcapacity
undertariffsthatenablepassthroughoffuelcosts.WeinitiatecoverageonNTPC(Buy,INR208),TPWR(Add,INR118),
ADANI (Buy, INR81) and JSW (Hold, INR46). Risk factors include higherthanexpected domestic coal production and
projectdelays.
UnderperformanceofpowerindextoNiftycontinuesin2012
Exhibit30:Absoluteandrelativeperformanceofpowerindex*(%) 1m 3m 6m 1y 2y 3y
Powerindex*
4.7
5.0
8.7
23.8
33.5 15.6
Nifty 1.5 0.8 0.4 8.1 0.7 50.8
PowerindexrelativetoNifty 3.3 5.7 8.3 15.6 32.8 35.2
Source:Bloomberg,AvendusResearch
Note:* Power index is calculated using the free float adjusted market capitalization of NTPC, TPWR,
ADANI,Reliance Power (RPWR IN,NR),Lanco Infratech (LANCI IN,NR),KSKEnergyVentures (KSK IN,
NR),JSWandTorrentPower(TPWIN,NR).
ThepowerindexhasunderperformedtheNiftyby35%overthelastthreeyears.Similarly,overthelast
threemonths,the indexhasunderperformedtheNiftyby 5.7%.Thepower indexoutperformedthe
NiftyinJan12andFeb12,likelytobeduetotheexpectationsofreformrelatedannouncementsinthe
FY13 budget. However, with the lackofannouncements on big reforms in the budget, the index has
underperformedNifty
over
the
last
one
month.
Earningsgrowthlikelytohavebottomedout
Consensusforecastsforthepowerindexindicatea22%yoygrowthinFY13fearningsafteran8%yo
y decline in FY12f earnings. There has been a significant drop in yoy growth in FY12f PAT as per
consensusforecastsinthepowerindex,leadingtoagrowthlowerthanthatoftheNifty,asofMar12.
However,asperconsensusforecasts,earningsgrowthfortheindexsPATinFY13fandFY14fishigher
thanthatoftheNifty.
Exhibit31:YoygrowthinconsensusforecastsforPAT*forpowerindexandNifty(%)(%) YoygrowthinFFadjustedPATforpowerindex YoygrowthinFFadjustedPATforNifty
FY12 FY13 FY14 FY12 FY13 FY14
Dec10
34 13
22
18
Mar11 32 18 19 18
Jun11 23 17 7 15 17 15
Sep11 15 15 12 12 16 13
Dec11 7 13 13 8 15 14
Mar12 8 22 17 7 17 12
Source:Bloomberg,AvendusResearch. Note:*PATisthefreefloatadjustedforbothNiftyandthepowerindex
Overthelastthree
months,theindexhas
underperformedtheNifty
by 5.7%
Consensusforecastsfor
thepowerindexindicatea
22%yoygrowthinFY13f
earningsafteran8%yoy
declineinFY12fearnings.
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Exhibit32:PowerindexspremiumtoNiftys1yrforwardP/E(%)
(5)
4
13
22
31
Jun09 Nov09 Ma y10 Nov10 Ma y11 Nov11 Apr12
Source:Bloomberg,AvendusResearch
Exhibit33:RelativeperformanceofpowerindextoNifty(%)
14.0
7.0
0.0
7.0
14.0
Jun10(3m) Dec10(3m) Jun11(3m) Dec11(3m) Apr12
Source:Bloomberg,AvendusResearch.
PowerindexmaytradeatapremiumtoNifty
The premium of the power indexs oneyear forward P/E to the Niftys oneyear forward P/E has
narrowedto4% inMar12from30% inJul10.The indexhastradedatapremiumbetweenSep07and
Apr12. A decline in the premium is likely to have been driven by the deteriorating outlook on yoy
earningsgrowthforFY12f.However,withabetteroutlookonearningsgrowthinFY13fandFY14f,the
powerindexmaytradeatapremiumtotheNifty.
Mar14fcapacityunderfixedtariffslikelytobehighestforADANI
Exhibit34:YearendcapacityundervariousofftakemodelsNTPC TPWR ADANI JSW SubTotal Industry
Asof
the
end
of
Mar12f
Totalcapacity(MW) 37,014 5,137 4,620 2,600 49,371 191,602
Asa%oftotalcapacity
PPA
Fuelcostpassthrough(1) 97 88 0 44 84 94
Fixedtariffs(2) 0 9 74 0 8 2
Merchant(3) 3 4 26 56 8 4
Total(1)+(2)+(3) 100 100 100 100 100 100
AsoftheendofMar14f
Totalcapacity(MW) 42,084 8,407 9,240 3,140 62,870 217,757
Asa%oftotalcapacity
PPA
Fuelcostpassthrough(4) 98 71 26 54 81 87
Fixedtariffs(5) 0 26 51 0 11 8
Merchant(6) 2 2 23 46 8 5
Total(4)+(5)+(6) 100 100 100 100 100 100
Source:Company,AvendusResearch
We have segmented the installed capacities of NTPC, TPWR, ADANI, JSW and the industry, as of the
endofMar12fandMar14f,underthreemodelsofofftake,whichare:(1)PPAfuelcostpassthrough;
(2)PPAfixedtariffs;and(3)merchanttariffs.Theearningsofcompanieswithahigherproportionof
Thepremiumofthe
powerindexsoneyear
forwardP/EtotheNiftys
oneyearforwardP/Ehas
narrowedto4%inMar12
from30%inJul10.
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installed capacity under fuel cost passthrough are likely to face lesser headwinds compared to
companies with a higher proportion under fixed tariffs. NTPC is likely to have 98% of the installed
capacityof42GW,asoftheendofMar14f,underthefuelcostpassthroughmodel.However,ADANIis
likelytohave51%oftheinstalledcapacityof9GW,asoftheendofMar14f,underfixedtariffs.
RoEsofADANIandJSWexposedtomerchantratesandcoallinkages
We have analyzedthreescenarios of theFY14f RoEfor NTPC,TPWR, ADANI andJSW (1)base case
current forecasts; (2) best case 20% increase in merchant tariffs in FY14f over FY13f, and COAL
honoring 100% FSAs signed with the respective companies; and (3) worst case 20% decrease in
merchant tariffs in FY14f over FY13f and no coal availability from COAL for the additional coal
requirements.Wehavenotconsideredanyrise inthecoalpricesforthecoalpurchasedthroughthe
spotmarket.RoEsofADANIispronetomaximumvariancefromthebasecasewithabasecaseFY14f
RoEof19%,bestcaseRoEof33%andworstcaseRoEof 20%.Similarly,JSWsRoEmayswingfroma
best case RoE of 23% to worst case RoE of 3%. However, NTPC and TPWRs RoEs are not likely to
changeduetoverylowexposuretomerchanttariffsandcoallinkages.
Exhibit35:RoEsforpowerproducersundervariousscenariosFY12f FY14f FY14f FY14f
Base
case Best
case
Worst
CaseNTPC 13.8 14.1 14.1 14.1
TPWR 12.6 8.6 8.6 8.6
ADANI 2.4 19.4 33.3 19.8
JSW 3.0 13.2 22.7 3.3
Mean 12.2 13.7 15.5 10.8
Source:Company,AvendusResearch
TargetpricebasedonDCFandSOTP
Wehavecalculatedthetargetprice(TP)forNTPC,ADANIandJSWthroughaDCFbasedmethodology.
For TPWR, the TP is calculated through an average of DCF and SOTPbased methodologies. During
Stage II, i.e., during FY15fFY26f, the CAGR of sales is likely to be higher for TPWR and ADANI
compared
to
JSW
and
NTPC
due
to
project
pipeline,
captive
coal
mines
and
strong
execution
capabilitiesevidentfromrecentcapacityadditions. EBITmarginsare likely toremainstablefor NTPC
andTPWRowingtoalargeproportionofbusinessunderregulatedequity,fuelledbydomesticcoaland
captivemines.HoweverADANIsmarginsare likelytoreducelargelyontheuseofimportedcoaland
largeofftakeunderfixedtariffs.
Exhibit36:ValuationssummaryCMP TP Upside P/E(x) P/B(x) RoE(%)
(INR) (INR) (%) FY12f FY13f FY14f FY12f FY13f FY14f FY12f FY13f FY14f
NTPC 160 208 30 13.4 12.8 11.2 1.8 1.6 1.5 13.8 13.4 14.1
TPWR 103 118 14 13.7 13.5 17.4 1.7 1.6 1.5 12.6 12.1 8.6
ADANI 63 81 28 91.3 9.2 8.1 2.1 1.7 1.4 2.4 20.9 19.4
JSW* 50 46 9 48.5 12.3 9.6 1.4 1.3 1.2 3.0 11.3 13.2
Source:Company,
Bloomberg,
Avendus
Research.
Note:*
for
JSW
FY12
numbers
are
actual
Exhibit37:KeyassumptionsforforecastsandtargetpriceRoE(%) SalesCAGR(%) EBITmargins(%) Grossblockturnover(x) WCdays
FY12f FY13f FY14f StageII* StageI II* StageII* StageI II* StageII* StageIII* StageII* StageIII*
NTPC 14 13 14 10 5 18 18 0.80 0.80 34 30
TPWR* 13 12 9 12 5 18 18 0.75 0.75 35 37
ADANI 2 21 19 12 5 29 20 0.45 0.65 50 50
JSW* 3 11 13 9 5 20 20 0.55 0.70 50 50
Source:Company,Bloomberg,AvendusResearch.
Note:*forJSWFY12numbersareactual.TPWRsTPiscalculatedusingtheaverageofDCF andSOTPbasedmethodologies
Wehavecalculatedthe
targetprice(TP)forNTPC,
ADANIandJSWthrougha
DCF
based
methodology.
ForTPWR,theTPis
calculatedthroughan
averageofDCF andSOTP
basedmethodolo ies.
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InitiatecoverageonNTPC,TPWR,ADANI,JSW
NTPCCapacityadditionislikelytoaccelerateto2.6GWperannumduringFY13FY15,wellabovethe2.3GW
perannuminthelastthreeyears.ByFY14f,CWIP,asaproportionoftotalassets,islikelytofallto35%.
Over98%
of
the
revenues
would
be
from
assets
with
regulated
tariff
that
provide
full
pass
through
of
higherfuelcosts;thisalongwithgrowth intheproportionofoperatingassets, is likelytoexpandthe
consolidatedRoEby30bpto14%inFY14f,despiteafallintheEBITDAmarginonariseinconsumption
ofhighercostcoal.NTPC is likelytobethepreferredpowersuppliertoDISCOMsdueto lowertariffs
comparedtopeers.StrongoperatingcashflowsinFY13fFY15fwouldsupportcapitalexpenditure.We
valueNTPCusingtheDCFmethodandinitiatecoveragewithaBuyratingandaMar13TPofINR208.
TPWRTPWRsRoE is likelytobottomoutbyFY14f.LossesattheMundraUMPPare likelytopulldownthe
consolidated RoE from 12.6% in FY12f to 8.6% in FY14f. However, from FY15f, losses at the Mundra
UMPParelikelytoreduceleadingtoanimprovementintheconsolidatedRoEevenifthecurrentPPA
remainsunchanged.TPWRs30%stakeintheIndonesiancoalJVimpliesapositivecorrelationbetween
consolidatedRoE
and
global
coal
prices.
We
have
not
assumed
any
rise
in
worldwide
coal
prices.
Cash
profits of INR68bn are likely to be generated over FY13fFY14f to support c4GW of projects under
planning.WithlikelydeclineintheRoEoverFY12fFY14f,thediscountinthecompanysP/Bcompared
topeersmayextend.Thestockamplyreflectstheseweaknesses.WeinitiatecoveragewithaMar13TP
ofINR118andanAddrating.Riskfactorsincludeadeclineinglobalcoalprices.
ADANIADANIislikelytoincreaseitsinstalledpowergenerationcapacityby2xoverFY13fFY14f.Withlower
uncertaintiesonthepowerofftakeaswellasfuelsecurityimpartedbycoallinkagesandparentADE,
ADANIs RoE is likely to expand 17% over FY13fFY14f. A potential rise in merchant sale realizations
drivenbytheelectionsin1H2014,pickupinopenaccess,andexposuretostatessuchasMaharashtra
andGujarat,arelikelytoenhanceRoEs.Higherproportionofinstalledcapacity,asofMar14f,is likely
tobetiedupunderfixedtariffs.Hence,earningsandRoEsaresensitivetopriceoffuelsourcedfrom
COALand
ADE.
Our
DCF
based
method
pegs
ADANIs
Mar13
TP
at
INR81.
We
initiate
with
a
Buy
rating.
RiskfactorsincludeupwardrevisioninpricesofcoalsourcedfromADEandCOAL.
JSWJSWsRoEislikelytochangesignificantlywithachangeinmerchanttariffs.Whilethecompanyssales
mixislikelytochangeinfavorofitsPPAswithJSWIandDISCOMs,46%oftheinstalledcapacity,asof
FY14,islikelytobesoldatmerchanttariffs.Theproportionoffuelrequirementexposedtovariations
is likely to reduce from 83% in FY12 to 39% in FY14f. A large proportion of installed capacity under
merchant and spot purchases for most of its fuel requirement leads to lower earnings visibility. This
maycaptheupsidetovaluations.WehaveusedtheDCFmethodthatpegstheMar13TPforJSWat
INR46.WeinitiatecoveragewithaHoldrating.
Capacityadditionislikely
toaccelerateto2.6GW
perannum
during
FY13
FY15,wellabovethe
2.3GWperannuminthe
lastthreeyears.
TPWRsRoEislikelyto
bottomoutbyFY14f.
Withloweruncertainties
onthepowerofftakeas
wellasfuelsecurity
impartedbyparentand
coallinkages,ADANIsRoE
islikelytoexpand17%
overFY13fFY14f
JSWsRoEislikelyto
changesignificantlywitha
changeinmerchant
tariffs.
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Riskfactors
Upsiderisks
Significantincreaseindomesticcoalproduction:Weexpectdomesticcoalproductiontoincreaseata CAGR of 5% over FY12fFY14f. A higherthanexpected increase in coal production is likely to
reducecostsforpowerproducersandleadtobetterRoEs.
NotableriseintariffbyDISCOMs:TheapprovaloftariffhikesbymostDISCOMsislikelytoimprovetheirabilitytobuyhighcostpower.Thismayraisemerchanttariffs,leadingtobetterrealizationsby
powerproducers.
Downsiderisks
Delay in project execution: A delay in project execution is likely to impact the consolidated RoEs,leadingtoadentinvaluations.
Significant increase in global coal price: A notable rise in global coal prices may increase royaltyexpensesandtaxes.ThismayimpacttheoperatingprofitsofADANIandJSW.
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Annexures
Assumptionsforcalculatingbanksexposuretopowersegments
The exposure of banks to the power sector, as of Dec11, was INR3.154bn (source: RBI Data onsectoraldeploymentofbankcreditJan12)
ExposureofPOWFandRECLtothepowersector,asofDec11,wasINR2,130bn(source:Company)Asperthefinancialstabilityreport,issueno.4,publishedbyRBI,oftheexposureofthe67banksto
thepowersector,55%wastothegenerationsegment,9%totransmission,28%todistribution,and
8%toPOWFandRECL
Inourcalculation,weexcludedtheexposureofbankstoPOWFandRECLWeassumedtheshareofvarioussegmentsfortheexposureofthe67bankstobeapplicabletothe
overallbankingsystem
Weconsidered2%ofthebankloansdisbursedtogeneratingcompaniesasworkingcapitalloansToestimatetheloanstoinstalledpowergeneratingplants,weassumedthatthecapacityaddedin
thelast
15
years
had
been
financed
through
70%
debt
and
30%
equity;
the
loan
repayment
period
is
takenas10years;Ofthetotalloans,75%arelikelytoberaisedthroughIndianbanksorthePOWF
orRECL
CapacityunderconstructionisestimatedwithdetailsoftheWIPcapacityoflistedpowergeneratingcompaniesanddocumentspublishedbyCentralElectricityAuthority(CEA)
50%oftheWIPcapacity is likelytobetiedupunderPPAand isbasedon importedcoal;wehaveassumedthatprofitableoperationofthis50%capacityislikelytobedifficult
For exposure to DISCOMs, 90% loans are likely to be disbursed to DISCOMs incurring operationallosses;hence,this90%exposureofbanks,POWFandRECLisalsolikelytobeatrisk
Exhibit38:Banks,POWFandRECL'sexposuretovariouspowersegments,asofDec11
(INRbn) POWF RECL* Banks Total %share
Generation 999 413 1,700 3,112 72
InstalledGeneration 1,548 36
WIPGeneration 1,564 36
Transmission 90 477 284 850 20
Distribution 56 0 883 939 22
WCloans 36 60 35 130 3
Total 1,180 950 2,902 5,031 100
Source:Company,AvendusResearch. Note:*RECLreportstheexposuretoT&Dsegmentandnotseparately
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ExposureofpowerproducerstokeyDISCOMs
TPWR:ShareofpowersalesfromMundraandMaithonunderPPAExhibit39:ExposuretoDISCOMsasofMar12fend
Gujarat
84%
Others
16%
Source:Company,AvendusResearch
Exhibit40:ExposuretoDISCOMsasofMar14fend
Gujarat
37%
Maharasht
ra
16%
Haryana
8% Punjab
16%
Rajasthan
8%
Others
15%
Source:Company,AvendusResearch
Note:WehaveconsideredMundraandMaithonscapacitytiedupunderPPAtoarriveattheexposure
tovarious
state
DISCOMs
ADANI:ShareofpowersalesfromMundra,TIrodaandKawaiunderPPAExhibit41:ExposuretoDISCOMsasofMar12fend
Gujarat
100%
Source:Company,AvendusResearch
Exhibit42:ExposuretoDISCOMsasofMar14fend
Gujarat
34%
Maharasht
ra
22%
Haryana24%
Rajasthan
20%
Source:Company,AvendusResearch
JSW:ShareofpowersalesfromBarmerandRatnagiriunderPPAExhibit43:ExposuretoDISCOMsasofMar12fend
Maharasht
ra
24%
Rajasthan
76%
Source:Company,AvendusResearch
Exhibit44:ExposuretoDISCOMsasofMar14fendMaharasht
ra
22%
Rajasthan
78%
Source:Company,AvendusResearch
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ClassificationofWIPcapacity
Exhibit45:YearwiseclassificationofLoAsforcoalbasedWIPcapacityonthebasisofofftake(MW)(MW) Merchant Costplus Fixedtariffs Total
FY06 63 2,480 0 2,543
FY07 2,387 4,677 3,931 10,995
FY08 2,999 16,650 9,382 29,031
FY09 5,194 14,609 11,377 31,180
FY10 2,993 1,100 11,977 16,070
FY11 1,915 0 3,365 5,280
Total 15,551 39,516 40,032 95,099
Source:Company,CEA,AvendusResearch
Exhibit46:YearwiseclassificationofLoAsforcoalbasedWIPcapacity(MW)(MW) COAL Captive Imported Total
FY06 1,980 500 63 2,543
FY07 1,457 6,670 2,868 10,995
FY08 5,621 20,760 2,649 29,030
FY09 7,355 12,470 11,355 31,180
FY10
6,510 5,010 4,550
16,070
FY11 5,280 0 0 5,280
Total 28,203 45,410 21,485 95,098
Source:Company,CEA,AvendusResearch
Hierarchyofpreferredfuelsupplyandofftakecombinations
Exhibit47:Proportionofcapacityunderdifferentfuelsupplyandofftakearrangements(%)Category Fuelsupply Offtake NTPC TPWR ADANI JSW
FY12f FY14f FY12f FY14f FY12f FY14f FY12f FY14f
IntheincreasingorderofrisktoRoE
A Captive Costplus 21 34
B Linkage Costplus 88 88 81 50 13
C Linkage Merchant 3 2 4 2 12 6
D Linkage Fixedtariffs 31 30
E Imported Costplus 9 11 7 21 13 23 19
F Imported Merchant 14 17 56 46
G Imported Fixedtariffs 9 26 43 22
Source:Company,AvendusResearch
Approvalsrequiredbeforecoalproductionbeginsatcaptivemine
Exhibit48:ApprovalsandrelatedauthoritiestopermitproductionatcaptivecoalblockApprovalsrequired Approvingauthority
Geologicalreport Statutorybody/central governmentministriesanddepartments
Mininglease
Central
and
state
government
ministries
and
departments
Miningplan MinistryofCoal
Forestclearance MoEFandstategovernmentdepartments
Coastalclearance Coastalregulatoryzone
Environmentclearance MoEFandstategovernmentdepartments
Landacquisition Staterevenuedepartmentandlocalauthorities
Source:Company,AvendusResearch
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AnalystCertification
Thefollowinganalyst(s)is(are)primarilyresponsibleforthisreportand,certifies(y)thattheopinion(s)onthesubjectcompany(ies)anditssecurity(ies)andanyotherviewsor
forecastsexpressedhereinaccuratelyreflecttheirpersonalview(s).Theyfurthercertifythatnopartoftheircompensationwas,isorwillbedirectlyorindirectlyrelatedtothe
specificrecommendation(s)orviewscontainedinthisresearchreport:AbhayMoghe.
Disclosures
MeaningofAvendusSecuritiesPrivateLimitedsequityresearchratings
Theratingrepresentstheexpectedchangeinthepriceofthestockoverahorizonof12months.
Buy:morethan+20% Add:+10%to+20% Hold: 10%to+10% Reduce: 10%to 20% Sell:lessthan 20%
Proportionofratingsineachcategoryandinvestmentbankingrelationships(%)
AttheendofMarch2012 Buy Add Hold Reduce Sell NR Total
Proportionofratingsineachcategory 29. 1 33. 3 17.4 11.6 1.4 7.2 100.0
Proportionofcompaniestowhommaterialinvestment bankingserviceswereofferedduringtheprevious12months 0.0 8.7 8.3 0.0 0.0 20.0 5.8
Analystdisclosures
None of the analysts involved in the preparation of this research report or a member of his/her household is an officer, director or supervisory board member of any of the
company(ies)that is/arethesubjectofthisresearchreport.Noneoftheanalystsinvolved inthepreparationofthisresearchreportormembersofhis/herhouseholdholdany
financialinterestinthesecuritiesofthecompany(ies)thatis/arethesubjectofthisresearchreport.Noneoftheanalystsinvolvedinthepreparationofthisresearchreporthave
receivedorpurchasedsharesofthesubjectcompanypriortothepublicofferingofthoseshares.
DisclosuresonpotentialconflictsofinterestforAvendusSecuritiesPrivateLimitedand/oritsassociatecompanies(Avendus)ason02May2012
Companies:NTPC(NTPCIN),TataPower(TPWRIN),AdaniPower(ADANIIN),JSWEnergy(JSWIN)
Asontheabovementioneddate,theshareholdingsofAvendusdoesnotexceed5%ofthetotalissuedsharecapitalofthecompaniesmentionedabove.Avendusdoesnothold
anyotherfinancialinterestintheabovementionedcompanies thatissignificantwithregardtotheresearchrecommendation. Asontheabovementioneddate,theshareholdings
oftheabovementionedcompaniesdoesnotexceed5%ofthetotalissuedsharecapitalofAvendus.Avendusisnotamarketmakerorliquidityprovider inthesecuritiesofthe
relevantissuerorinanyrelatedderivatives.Avendushasnotbeenaleadmanagerorcoleadmanagerofapubliclydisclosedofferofsecuritiesoftheabovementionedcompanies
orinanyrelatedderivativesoverthepast12months.Overthepast12months,Avendushasnotbeenpartytoanagreementwiththeabovementionedcompanies withregardto
theprovisionofotherinvestment bankingservicesthatdonotentailthedisclosureofanyconfidential commercialinformation. Avendusisnotpartytoanagreementwiththe
subjectcompany(ies)ofthisresearchreportwithregardtotheproductionofthisresearchreport.
Sharepricehistoryandratingchanges
Buy,02May,208
140
165
190
215
May11 Jun11 Aug11 Oct11 Nov11 Jan12 Mar12 May12
NTPC(InitiatedonMay02, 12) Rating,Date,TP(INR)
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Buy,02May,81
55
80
105
130
May11 Jun11 Aug11 Oct11 Nov11 Jan12 Mar12 May12
ADANI(InitiatedonMay02, 12) Rating,Date,TP(INR)
Add,02May,118
70
95
120
145
May11 Jun11 Aug11 Oct11 Nov11 Jan12 Mar12 May12
TPWR(InitiatedonMay02, 12) Ra ting,Date,TP(INR)
Hold,02May,46
30
50
70
90
May11 Jun11 Aug11 Oct11 Nov11 Jan12 Mar12 May12
JSW(InitiatedonMay02, 12) Rating,Date,TP(INR)
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