Published on 12/08/2019 10:54:15 AM | Source: Emkay Global Financial Services Ltd

Power Sector - Peak summer and elections drive demand uptick By Emkay Global

Posted in Broking Firm Views - Sector Report| #Power Sector #Emkay Global Financial Services Ltd. #Sector Report

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Peak summer and elections drive demand uptick

* Q1FY20 is expected to see positive results for Emkay's power coverage universe. Strong demand, driven by the peak summer and general elections, has led to a rise in generation which in turn led to higher offtake by discoms.

* Merchant prices declined significantly yoy despite higher demand, falling 21.5% yoy to Rs3.24/unit, as incremental demand was met by higher contribution from Hydro, Solar and Wind stations during the quarter. As a result, NHPC and JSW energy are likely to report earnings growth during the quarter.

* India's electricity generation increased 7.2% yoy to ~371.5bn units in Q1FY20, primarily due to strong demand, driven by the peak summer and the general elections. Power generation in the coal segment increased 4.4% yoy, while it rose 25.2% yoy in the hydro segment. Generation also increased 8.5% yoy and 18.0% yoy in the nuclear and renewables segments, respectively. Generation across the gas stations declined 3.5%.

* The coal supply position improved significantly during the quarter, with five plants facing sub-critical levels of inventory in June 2019 vs. 16 plants yoy. However, no plant had faced sub critical levels of inventory in March 2018.

* Average peak and base deficits improved to 0.4% each in April-May'19 vs. 1.2% and 0.6% in Q1FY19, respectively. The average spot rate on the exchange decreased significantly by 21.5% yoy but was up 2.0% qoq to Rs3.2/unit.

* Capacity addition remained Nil during April-May'19 vs. the target of 1.8GW for the period.

* Strong results: NHPC, PGCIL, GIPCL and CESC are likely to register strong earnings growth in Q1FY20. In our view, NHPC's earnings will be driven by improved PAF and generation, led by higher water availability. PGCIL's earnings would be driven by strong capitalization in FY19. CESC’s earnings will be driven by higher power demand.

* Weak results: the power universe within our coverage is unlikely to witness any weak results during the quarter.

* The sector should continue to witness new reforms under the second term of the NDA government to revive stranded assets and ease discom stress. However, the successful execution of this continues to remain an issue. Centre's focus on medium-term PPAs through Pilot Schemes should revive stressed assets and quick resolution of NPAs should be prioritized. Efforts to improve domestic coal supply will continue with the major focus on renewable capacity additions to meet the Paris Commitment on clean energy. We expect power demand to continue to increase with a rise in power connectivity and effort to provide 24x7 power supply across the country. We continue to prefer regulated return entities such as NTPC and CESC, and maintain our OW stance on them in EAP. Except for these, the sector offers event-specific trading opportunities rather than any serious investment options


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