Thursday, October 6, 2011

Power Sector in India: Research report

�� We met with several of our industry contacts over the past few days.
�� Government officials in Delhi: interestingly it appears from our channel
checks in Delhi that the target capacity additions in 12th plan and 13th plan
could be close to 76GW and 93GW, respectively, a material downward
adjustment from the 100GW envisaged in the 12th plan around 6-12 months
ago. Coal supply still a major issue with officials noting that the power sector
will likely receive ~320mt in FY12 vs. CIL’s promise of 347mt. Distribution
investment appears to be suffering with 11th plan capex in generation likely to
come in ~60% of target, transmission ~85%, but distribution close to only
~25% of target. Two schools of thought, 1) a whole lot of distribution
capex will happen soon, or 2) a lack of distribution capex could constrain
incremental generation volumes. With little change in key fiscal positions of
key SEBs, we subscribe to the latter. Lower demand and domestic shortages
still support Jindal Steel and Power, while merchant prices in the medium
term could be supported by cost-push from coal shortages - preferred
exposure would be Adani Power, but we’d wait at least until after 2Q12
when earnings in the sector may be materially squeezed.
�� Power sector lawyers in Mumbai: today we met with lawyers (top 5 in India)
actively involved in the power sector. In their view, there will be scope for Tata
Power to pass-through the negative impact of the Indonesia coal policy,
although they expect this to take time. In their view, this will be driven by the
Ministry. At around Rs.100/share, TPWR appears good value, fully factoring
in the downside from Mundra. Any ability to pass-through the Indonesian
policy change would add ~Rs.6/share (+5% valuation) and increase FY14
earnings by ~15%. Additionally, the Supreme Court hearing for the
TPWR/RPWR case over whether Reliance Power can use the excess coal
for the Sasan project is expected in February 2012. In their view, if ruling is
not in RPWR’s favour, the Sasan project, and perhaps Tilaiya, may not go
ahead. We're happy to remain Underweight RPWR until an outcome of the
court case in known.
�� Coal producer in Indonesia: we spoke to one of the largest thermal coal
producers in Indonesia to get a sense on the pricing for low quality coal for
Indian IPP’s. Currently they are seeing discounts of ~20% FOB for
4200kcal/kg (low quality coal). After shipping/handling, this translates to
around a 15% discount on a delivered basis. However, they also noted that
there is increasing appetite from buyers (mainly China) for lower quality coal,
especially for new power plant coming online from mid-2012. Therefore the
risk is that this discount reduces. We assume a 15% discount in our
forecasts. JSW Energy is the biggest buyer of spot imported coal, where we
see further downside.

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