Published on 4/08/2020 12:56:14 PM | Source: Emkay Global Financial Services Ltd

Power Sector Update - Generation Tumbled During Lockdown; Earnings To See steep Decline By Emkay Global

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

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Generation tumbled during lockdown; earnings to see steep decline

* Q1FY20 earnings are expected to be disappointing in Emkay's power coverage universe. Demand/generation across India fell significantly by ~17%/18% in Q1FY21 largely due to subdued power demand during the lockdown. Demand across the C&I segment was halted completely during April-May’20 as industries and offices were shut. June’20 saw minor recovery in demand, which fell 11% yoy vs. a decline of 22%/14% yoy in April/May’20. Thus, PLF was down across stations but availability picked up due to improved inventory levels. The moratorium on bill payments has impacted discoms’ collection efficiency and stretched its working capital. This has impacted the discoms outstanding to the gencos, which increased to ~Rs1.26tn as on May’20 vs. Rs950bn in Mar’20. Deficits remained largely flat at 0.4%.

* Merchant rates fell ~26% yoy in Q1FY21 to Rs2.4/unit and as a result, plants having untied capacities have suffered as such low rates make it unviable for businesses to operate plants. Thus, we believe that the regulated entities like NTPC, NHPC and PGCIL are likely to remain largely immune to the lockdown’s impact as their returns are based on plant availability and not PLF. However, these entities have been asked by the Power Ministry to offer a one-time discount to the discoms to the tune of Rs30bn and we have adjusted these expenses in Q1FY21 numbers.

* Coal production and dispatches to power declined significantly during April-May’20 by 14.8%/26.0 yoy, while coal inventory across power stations increased to 47.5mn tons by the end of Q1FY21, up 78.5% yoy.

* As a result, we expect earnings across our coverage companies to decline by 7%-20% range factoring, lower generation, low incentives, fall in merchant rates and one off discount offered to the discoms.

View: The country-wide lockdown due to Covid-19 has led to a significant 17% yoy/18% yoy decline in power demand/generation during Q1FY21, mainly due to a complete shutdown of industrial and commercial sectors. Demand, however, is expected to improve in Q2FY21, with the beginning of the unlocking phase in the country, which would lead to a revival in both industrial and commercial activities. However, we expect power demand to normalize only from Q3FY21 onwards. Merchant players should continue to face the heat due to subdued power demand and fall in merchant rates. Discoms outstanding to gencos has reached Rs1.26tn as on May’20, which is close to its all-time high of Rs1.35tn in Nov’15. However, with improvement in collection efficiency from Q2FY20 and disbursal of loan under the Atmanirbhar scheme by PFC/REC, the discoms liquidity stress is expected to ease off a bit, which would lead to improvement in its outstanding levels.

We continue to prefer regulated entities such as NTPC, NHPC and PGCIL that operate in a risk-averse regulated business environment and earn a fixed return on invested project equities, provided normative availability is achieved.


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