Published on 17/07/2017 11:32:34 AM | Source: ICICI Securities
Power and Mining Sector Update PGCIL strong show to continue; JSW and CIL to report weak numbers - ICICI Sec
Q1FY18: PGCIL strong show to continue; JSW and CIL to report weak numbers
Reason for report: Q1FY18 earnings preview
Power Grid’s (PGCIL) secular earnings growth is likely to continue in the quarter ended Jun’17 as well. PGCIL remains our top pick in the sector given its strong asset pipeline, which will continue driving earnings expansion at least over the next 3-4 years. However, with the exception of Tata Power (TPWR), which will likely benefit from high international coal prices, and CESC (largely due to change in accounting method), companies under our coverage are likely to struggle on the profitability front or report middling growth. Coal India’s (CIL) woes arise from its inability to take a price hike to offset the double whammy of mine derating and increased provisioning for wage and gratuity hikes.
Q1FY18 preview – Key actionables:
* PGCIL: Earnings growth of ~20% YoY expected for on >Rs658bn capitalisation over the past nine quarters. EBITDA margin expansion is expected as a result of improving operating leverage.
* JSW Energy (JSWEL): PAT likely to decline 41% YoY in peak hydro-generation quarter as the company suffers from the double squeeze of weak merchant demand and realisations and sharp increase in global coal prices, in addition to the increased burden of finance and depreciation expenditures post acquisition of Baspa and Karcham Wangtoo hydro power plants.
* Coal India (CIL): Q1FY18 PAT likely to decline 12.4% YoY due to wage hike provisioning and impact of mine derating on FSA realisations.
* NTPC: 5.5% YoY PAT growth expected as the benefit from YoY increase in regulated equity will be partially offset by wage-hike provisioning. Company is likely to earn an incentive income of ~Rs2bn in Q1FY18.
* TPWR: Expected to witness sharp PAT growth in Q1FY18 on benefit from global coal price rally and fuel-cost adjustment at Mundra (which will lower under-recoveries).
* Maintain PGCIL as our top pick in the sector as it offers a strong 16.3% CAGR in earnings over FY16-FY20E. Expect capital efficiency to improve as capitalisation would likely exceed capex in FY18-FY20.
* NTPC – Maintain ADD: Impact of possible favourable resolution of coal cost underrecovery issue will likely be offset by possible delay in commissioning of projects (on current weak demand scenario), shelving of solar capacity expansion plans (due to company’s inability to meet the sharp drop in bid tariffs) and delay in closure of Chhabra plant purchase deal (which was expected to serve as template for future inorganic growth). However, strong asset commissioning over FY17-FY20E will drive earnings CAGR of 12.6%.
* Coal India – HOLD: We view the recent mine derating as a major negative for the company as it would likely prune revenues by ~Rs20bn. This combined with the impending wage hike impact of Rs45bn, unfavourable grade mix and one-time provisioning for increased gratuity (Rs40bn one-time impact) will mean that the company will have to take an FSA price-hike of 10-11% - which we believe will be difficult to achieve given the government’s focus on power cost reduction.
* JSW Energy – HOLD: High international coal costs along with the end to pricing premium in southern markets (on improvement in transmission connectivity and increased renewable capacity) means limited upside for the company, both in terms of earnings and valuations.
* Adani Power: Maintain SELL as a large part of its books is stuck in projects earning no or sub-optimal returns.
* Prefer CESC among midcaps on value unlock from business restructuring, strong balance sheet and reasonable leverage to power demand recovery.
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