Regulated Entities to Deliver Better Show; Higher Fuel Cost to Affect Private Players
During 1QFY18, all-India power demand increased by 3.74% YoY to 307bn units compared to 296bn units in 1QFY17 led by 17.5% rise in hydro generation. Coal-based generation grew at a slower pace of 2.2% YoY, while nuclear generation remained flat. All-India PLF of the thermal sector stood at 57.4% in 1QFY18 vs. 60.7% in 1QFY17 due to lower system demand and increased generation capacity. 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 utilities expected to aid improvement in power demand.
International Coal Prices Continue to Remain Strong at USD80/tonne
Average price of Indonesia Coal Reference Index 6322kcal HBA Marker stood at US$80/tonne in 1QFY18 (vs. US$52/tonne in 1QFY17 and $83/tonne in 4QFY17) owing to downsizing of mining output and revival of demand. Though domestic coal supply continues to be adequate, strong international coal prices will continue to impact merchant players.
Short-term Electricity Prices in IEX: With rising temperature and early arrival of summer, the market saw average increase in volume. However, with monsoons unleashing across most parts of the country, the demand for power saw a marginal decline recently. With one price across market on several days, the market hardly experienced any Inter-State transmission congestion. Average Market Clearing Price (MCP) increased by ~9.9% YoY to Rs2.76/unit in 1QFY18. With reinforcement and augmentation of Inter-state Transmission Network and decreased congestion volume loss was very low.
Quarterly Performance to see improvement
We expect improvement in 1QFY18 numbers for the companies under our coverage universe due to better performance of Tata Power, PGCIL and NTPC, while JSW Energy, Adani Power are expected to report decline in earnings due to higher international coal prices and lower merchant realization. Amongst regulated players, PGCIL is expected to sustain strong numbers driven by higher capitalization and full benefits of higher commissioning in FY17. NTPC is expected to report improved earnings owing to increase in regulated equity.
Tata Power is expected to report a significant 451% YoY jump in earnings led by consolidation of Welspun Renewables and higher estimated profit contribution from Indo coal mine. Further, Adani Power is expected to deliver a subdued performance due to higher international coal prices, lower merchant realization and lower PLF. Adani Power is expected deliver subdued performance due to higher international coal prices, lower merchant realization and lower PLF, while JSW Energy’s revenue and earnings are likely to be negatively impacted by lower generation (at Vijaynagar and Ratnagiri plants), strong international coal prices. CESC would grow at a steady pace on growth in regulated equity.
EBITDA margins of the company under our coverage universe would decline marginally by 120bps owing to lower margins by JSW Energy, Adani Power and CESC despite rise in operating margins by PGCIL and NTPC. 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 1QFY18. We expect overall profit of the company under our coverage universe to show improvement of 6.8% YoY led by PGCIL and Tata Power, while Adani Power, JSW Energy and Coal India would continue to show decline in profits. NTPC and CESC are expected to show marginal improvement in profit.
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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