Power Sector – Continued Muted Demand & Higher Fuel Cost Continue to Impact Profitability
All-India power demand increased by 3.3% YoY to 292bn units in 4QFY17 as against 282bn units in 4QFY16. While hydel power generation rose by 8.6% YoY, thermal power generation grew by 2.9% YoY during the quarter. All-India PLF for thermal sector stood at 61.9% in 4QFY17 compared to 64.1% in 4QFY16 due to lower system demand. PLF stood at 60.0% in FY17 vs. 62.3% in FY16. Coal supply position at power plants remained strong as few plants facing subcritical level of coal inventory. In our view, improving industrial demand along with improving financials of the state-run power will lead to improvement power demand.
Spot Global Coal Prices Stable in 4QFY17, Albeit Higher on YoY Basis
The average price of Indonesia Coal Reference Index 6300kcal HBA Marker stood at US$83/tonne in 4QFY17 as against US$52 per tonne in 4QFY16 while $85/tonne in 3QFY17. Yearly coal rise owing to downsizing the in mining output and revival of demand. With rising temperature and early arrival of summer, the market saw average increase in volumes. The average Market Clearing Price (MCP) declined by ~11% YoY to Rs2.45/unit in 4QFY17. The import of power to Southern region was congested throughout the quarter. Spot power market registered a trade of 39.8bn units in FY17, registering ~17% YoY rise over 34bn units traded in FY16. Average MCP remained competitive at Rs2.41/unit in FY17, vs. Rs2.73/unit in FY16 (-12% YoY). With reinforcement and augmentation of Inter-state Transmission Network, volume loss due to congestion reduced to 1.5bn units in FY17 from 2.1bn units in FY16.
Quarterly Performance to Remain Muted Barring Regulated Entities
We expect muted numbers for the companies under our coverage universe in Q4FY17 due to poor performance of JSW Energy, Adani Power and CESC, which are expected to report decline in earnings due to higher international coal prices and lower merchant realization. Meanwhile, regulated entities like Power Grid Corporation of India (PGCIL) and NTPC are expected to report good numbers driven by higher capitalization and better operating efficiencies. Tata Power is expected to report higher numbers on account of better operating performances.
EBITDA margins for our coverage universe would decline by 90bps owing to lower margins by JSW Energy, Adani Power, CESC and NTPC despite increase in operating margins by PGCIL and Tata Power. On account of sharp YoY decline in e-auction price, higher staff cost and other expenses, net profit of Coal India is likely to decline by 28.1% YoY in 4QFY17. We expect overall profits for our coverage universe would decline by 13% YoY on account of decline in profits by JSW Energy, Adani Power and CESC. However, NTPC, Tata Power and PGCIL are expected deliver increase in profits.
The industry would continue to face challenges like lower PLF and lower system demand. The private players would continue to show low profits due to legal disputes relating to coal pricing and supply issues. Amongst regulated players, PGCIL is expected to sustain strong numbers driven by higher capitalization and full benefits of higher commissioning in 9QFY17, while NTPC is expected to report improved earnings driven by revenue owing to improved PLFs, higher incentives and increase in regulated book on account. Tata Power’s consolidated PAT – before comprehensive income – is expected to improve owing to lower MTM losses at Coastal Gujarat Power (CGPL) and better operating performances by key subsidiaries and Indonesian coal mines. Adani Power is expected deliver subdued performance due to higher international coal prices, lower merchant realization and lower PLF. Further, despite higher generation revenue and earnings of JSW Energy are likely to be negatively impacted by lower realization, higher interest and depreciation.
While the domestic power sector continues to face problems relating to poor system demand, low PPAs, and poor financials of the DISCOMs. However, recently launched UDAY scheme – which ended in Mar’17 – witnessed positive response from the DISCOMs, which should eventually result in their improved financial health and ability to procure more power. Despite lower per-capita power consumption as a demand-driver, subdued economic activity resulted in lower power demand from the industrial consumers, which has led to the SEBs shedding load to residential and agricultural consumers. However, we believe that improvement in policy environment and infrastructure spend coupled with manufacturing activities will aid in reviving the demand environment for the power sector. In our view, implementation of UDAY scheme is expected to improve power demand in FY18E, while increase in coal output would provide a much needed fillip to the sector.
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