Published on 18/01/2020 10:12:24 AM | Source: ICICI Securities Ltd

Power Sector - Challenges remain, but long-term view intact By ICICI Securities

Posted in Broking Firm Views - Sector Report| #Power Sector #Sector Report #ICICI Securities

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Challenges remain, but long-term view intact

Although familiar challenges continued to affect the sector during Q3FY20, improvement in coal availability and demand for power during Dec’19 points towards a better Q4. Generation figures for 9MFY20 were flat YoY (thermal power down 3.2% YoY) due to negligible demand growth with base demand rising a mere 1.2% YoY and peak demand growing 3.8% YoY. Challenges during Q3FY20 included: 1) reduced coal supplies in Oct-Nov’19 due to floods (supplies improved significantly in Dec’19), 2) states dishonouring PPAs, and 3) rise in discom dues despite LC mechanism (primarily overdues prior to Aug’19). On the other hand, positives included: 1) lower cost of power procurement due to lower international coal prices, and 2) higher hydro power generation. NTPC and Coal India are our top picks in the sector. 9,880MW generation capacity (including renewable energy) has been added to the sector during 8MFY20. During 9MFY20, thermal PLF has been at 55.8%, down 429bps YoY. Renewable energy generation growth was better than overall generation growth during 9MFY20, up 5.9% YoY. Major reasons for the tepid growth were: variation in wind speed and issues related to offtake by states, which are continuously reneging on their RPO obligations and are opting for cheaper merchant power/short-term PPAs instead. Mounting discom losses remain a concern and discom overdues continue to rise every month (discom outstanding as at Nov’19-end stood at Rs811bn, while overdues reached Rs718bn compared to Rs804bn (losses) and Rs617bn (overdues) as at Jul’19-end), reflecting the worsening financial conditions of the states.


Q3FY20E preview – Key actionables:

* Maintain NTPC as one of our top picks: Significant capacity commissioning is likely to continue while improvement in capital efficiency will help drive strong earnings growth. Company stands to gain as its availability-linked under-recoveries abate (expect under-recoveries to decline significantly from Rs5.4bn {annualised} for 8MFY20 compared to Rs8bn in FY19) and final tariff regulations (FY19-FY24) provide earnings visibility over the next five years. We estimate NTPC’s profit to increase 45% YoY to Rs34bn in Q3FY20. Maintain BUY with a target price of Rs165/share.

* Coal India the other top pick: Production (of 58mnte) in Dec’19 showed a strong 7% YoY resurge. Higher supply volumes to non-power consumers, which command higher premium than power FSA, helped improve realisations during the quarter. We expect ramp-up of daily production in Q4FY20 from the current 2mnte levels to 2.4mnte (company targets 3mnte) and estimate production of 600mnte for FY20E. Also, Coal India is the biggest beneficiary of the recent reduction in corporate tax rate, hence we expect dividend for FY20 to be ramped up significantly. We estimate the company’s profit to increase 2.1% YoY to Rs46.6bn in Q3FY20. Maintain BUY with a target price of Rs322/share.

* IPPs: Among IPPs, we expect JSW Energy to outperform due to lower cost of imported coal as international coal prices remain muted, as well as higher hydro generation. Also, its low leverage provides fiscal room for further asset buyouts. CESC’s profit for the quarter is expected to improve 15% YoY while Torrent Power’s profit will likely improve 18% YoY on account of reduction in interest cost, growth in regulated equity and higher renewable generation.


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