Power up without shocks
MAULIK TEWARI
Stocks in the power sector have put up an electrifying performance. But there are only some that you can plug into
The Indian power sector has been short-circuited by many troubles. These range from inadequate and costly fuel for some players to un-remunerative tariffs, and high debt and large foreign exchange outgo for others. But, giving a go-by to these concerns, power sector stocks have put up an electrifying performance on the bourses. They have gained between 30 per cent and 94 per cent from the September 2013 lows to now, beating the Sensex’s gain of 36 per cent. The only exception has been NTPC, which gained a modest 8 per cent.
Why this euphoria? Hope that the Modi-led Government will fix the problem of coal shortage boosted sentiment. Recent orders by the central and state sector regulators permitting some companies to hike tariffs too has come as a relief, though the last word is not yet out on this.
Despite the problems ailing the sector, some companies are better placed than others and staying invested in them can reap rewards. So, what sets apart the men from the boys?
Fuelling worries
With fuel (coal and gas) costs accounting for up to 60 per cent of net sales for many power producers, access to an assured and viable fuel supply is critical. India’s largest power generator NTPC is best placed on this front. It sources 90 per cent of its coal requirement under fuel supply agreements entered into with Coal India, which ensure certain guaranteed supply. The rest is largely met through imports. Tariffs set by the Central Electricity Regulatory Commission (CERC) allow NTPC to fully pass-through increase in fuel costs through higher tariffs. This puts it on a better footing. Moreover, NTPC has been allocated 10 coal blocks with a production potential of 100 million tonnes per annum, which in due course can cater to about half its existing installed power capacity. Of these, the Chatti-Bariatu mine is expected to start production by the end of 2014-15.
While Reliance Power is largely fuel-secure, a change in Indonesian coal export regulations has affected the viability of its 3,960-MW imported coal-based Krishnapatnam project currently under development. It also awaits gas allocation for its yet-to-be-operational 2,400-MW Samalkot project. That apart, fuel linkages with Coal India, acquisition of captive coal mines in India and mining concessions in Indonesia for both operational and under-implementation projects, provide comfort.
On hot coals
Tata Power and Adani Power, on the other hand, have seen fuel woes affect their operations adversely. Their respective ultra-mega power plants in Mundra, Gujarat, were originally envisaged to be run on cheap imported coal. But consequent to a change in Indonesian regulations in 2011, coal imports from that country turned expensive, rendering operations at these plants unviable. With these plants accounting for half of the companies’ capacity, their consolidated numbers dipped into the red. Also, Adani Power’s 1,320 MW Kawai plant in Rajasthan, which is yet to receive supplies from Coal India, has been forced to rely on coal imports.
The recent nod from the Australian Government to Adani Enterprises for developing a 60-million-tonnes per annum coal mine there, can benefit Adani Power. But it will possibly be about three years before production commences. Also, the cost of coal will have to be watched out for.
JSW Energy too runs a substantial 65 per cent of its operational capacity on imported coal. That it sells a large part of its power in the volatile merchant market makes it all the more vulnerable to a spike in fuel costs.
Out on gas
Then, take Torrent Power which has seen nearly 80 per cent of its generation capacity of 2,100 MW turn inoperative over the last two years, consequent to the decline in gas production from Reliance Industries’ KG-D6 block.
With State distribution utilities refusing to purchase expensively produced power, using imported natural gas too has not been an option. Torrent Power has also been forced to buy power from outside sources to meet the requirement of its distribution business, significantly increasing its power purchasing costs. Consequently, its profit has taken a big hit in the past two years.
Tariff wars
The extent to which escalating costs can be passed on to consumers has thus emerged as a big differentiator in the power sector. Assured sales to customers at tariffs that are regularly revised to allow cost increases to be passed through, are therefore something to look out for.
Power plants of Tata Power and Adani Power have borne the brunt of sharply rising imported fuel costs that have surpassed the tariffs they charge. Following the companies’ petition for relief, the CERC allowed them to charge higher tariffs to recover costs.
Following an appeal from the state distribution utilities concerned, the Appellate Tribunal recently upheld (partly) the CERC order. With the distribution utilities likely to challenge this order too, the risk that it may be overturned remains.
But leaving aside the Mundra power plant, a large part of Tata Power’s operations (generation and distribution) are based on tariffs that allow it complete cost pass-through, plus an assured return on equity. Also, long-term power purchase agreements with state distribution utilities ensure guaranteed sales. On the other hand, Adani Power sells most of its power at levellised tariffs with no fuel escalation provisions.
Likewise, recent favourable orders from the Gujarat Electricity Regulatory Commission allowing Torrent Power’s distribution business to charge higher tariffs have come as a big relief for the company. But that alone may not suffice. An increase in gas availability is crucial for growth in power generation by the company.
But, it is the state-owned NTPC which stands out among all. It sells its entire power under long-term contracts and at CERC-determined tariffs that cushion it against rising costs and also provide an assured return.
In contrast, JSW Energy sells up to half its power in the volatile merchant market, exposing it to market-determined tariffs with no assured buyers.
Reliance Power has already tied up with buyers for both its operational and a much larger upcoming generation capacity.
While a part of its operational plants earn regulated tariffs, a large part of the upcoming projects are those that have been competitively bid for. But with factors such as a change in Indonesian coal export regulations implying an increase in future running costs of these plants, Reliance Power has already approached CERC with tariff revision petitions. These have not yet been decided upon.
Foreign exchange risk
The direction of the rupee too can play a big role in the fortunes of power generators. Adani Power and JSW Energy have significant outgoes in foreign exchange, exposing them to any sharp depreciation in the rupee.
Adani Power, for instance, spent ₹5,663 crore, comprising a third of its revenues, in forex during 2013-14. Likewise, in the year before, forex spending accounted for a large 60 per cent of the company’s sales. Ditto for JSW Energy which spent ₹3,110 crore, a large 35 per cent of its revenues, in forex during 2012-13. These expenses have largely been on fuel imports.
What’s in, what’s not
Overall, after weighing all the above, at the current market price of ₹138, the stock of NTPC trades at a reasonable 10 times its consolidated 2013-14 earnings. While NTPC’s earnings will take a hit (as they have in the June 2014 quarter) post the more stringent CERC tariff regulations announced in February, its fundamentals remain strong.
After the sharp rally, at the current market price of ₹74, JSW Energy trades at an expensive 16 times its consolidated 2013-14 earnings. Moreover, its large exposure to the merchant market makes it a risky investment that can well be avoided.
But for the loss-making Mundra plant, Tata Power’s operations are profitable. At the current market price of ₹92, the stock of Tata Power trades at a reasonable 1.6 times its consolidated book value for 2013-14.
A positive ruling on tariff hikes for the Mundra plant will give a big boost to earnings and is one reason for holding on to the stock.
While Adani Power too stands to gain from a favourable tariff order on its Mundra plant, investors could stay away given the other concerns affecting the company. Also, after the recent rally, the stock is trading expensive relative to better-off peers such as Tata Power.
Torrent Power, which is reasonably valued, has gained some succour from recently-passed favourable tariff orders. But an increase in gas availability is crucial, which may be possible only two-three years from now, if domestic gas supplies rise, once the pricing issue is settled.
The laggards
With a major part of hydro power producer NHPC’s planned capacities to be commissioned only after September 2016, revenue growth is likely to be muted over the next two years.
Moreover, given the company’s unimpressive track record in project implementation, investors could exit the stock. Indiabulls Power too, which commenced power generation for the first time last fiscal, has seen many of its project deadlines getting stretched.
While it has fuel supply and power purchase agreements in place for many of its projects, the delays have had a significant bearing on its earnings. It is precariously placed with interest coverage ratio of only 0.3 times.
Transmitting high returns
Do you find the current state of affairs in the power sector somewhat unsettling? If so, you can safely bet on stocks such as Power Grid Corporation of India (PowerGrid). At the current market price of ₹132, the stock trades at 14 times its consolidated earnings for 2013-14 — nearly the same as its five-year average valuation. It is, nonetheless, a decent buy given its growth potential.
Assured returns
PowerGrid has near monopoly on the country’s inter-state and inter-regional transmission network and therefore stands to benefit from the thrust on increasing the country’s power transmission capacity. It has set out a capital expenditure of ₹22,450 crore for the current fiscal and plans to expand its existing inter-regional transmission capacity of 36 GW by 7.3 GW during this period.
Tariffs set by the Central Electricity Regulatory Commission allow PowerGrid a complete cost pass-through plus an assured returnon its commissioned projects. The company’s growth prospects are thus primarily dependent on expansions in transmission capacity, something which it has delivered on. The same is reflected in its rising revenues and profits too. Besides, Power Grid’s foray into intra-state transmission is on track.
Gaining trade
You can also consider investing in PTC India, the country’s leading power trader as also the nodal agency for cross-border power trades. At the current market price of ₹80, the stock trades cheap at about seven times its consolidated earnings for 2013-14, less than half its five-year average valuation.
PTC India buys short-term power surpluses of state utilities, independent power producers and captive power plants and sells them to customers (mainly state utilities) that face a deficit. Besides, it enters into long-term agreements for assured power purchases and sales.
Volume game
Sales under short-term (less than one year) contracts account for close to 60 per cent of the volumes. With margins on short-term trades capped at 7 paise per unit and actual margins earned being even lower, volume growth holds the key to higher revenues.
For the nine-month period ended December 2013, PTC India traded 27,645 million units, up 30 per cent from the year-ago period. With a 30 per cent share in the short-term power market, PTC India is well placed to benefit from the power demand-supply imbalance in the country.
Healthy performance of the subsidiary PTC India Financial Services too provides strong support.
(This article was published on August 10, 2014)
http://www.thehindubusinessline.com/features/investment-world/power-upwithout-shocks/article6301355.ece?homepage=true
MAULIK TEWARI
Stocks in the power sector have put up an electrifying performance. But there are only some that you can plug into
The Indian power sector has been short-circuited by many troubles. These range from inadequate and costly fuel for some players to un-remunerative tariffs, and high debt and large foreign exchange outgo for others. But, giving a go-by to these concerns, power sector stocks have put up an electrifying performance on the bourses. They have gained between 30 per cent and 94 per cent from the September 2013 lows to now, beating the Sensex’s gain of 36 per cent. The only exception has been NTPC, which gained a modest 8 per cent.
Why this euphoria? Hope that the Modi-led Government will fix the problem of coal shortage boosted sentiment. Recent orders by the central and state sector regulators permitting some companies to hike tariffs too has come as a relief, though the last word is not yet out on this.
Despite the problems ailing the sector, some companies are better placed than others and staying invested in them can reap rewards. So, what sets apart the men from the boys?
Fuelling worries
With fuel (coal and gas) costs accounting for up to 60 per cent of net sales for many power producers, access to an assured and viable fuel supply is critical. India’s largest power generator NTPC is best placed on this front. It sources 90 per cent of its coal requirement under fuel supply agreements entered into with Coal India, which ensure certain guaranteed supply. The rest is largely met through imports. Tariffs set by the Central Electricity Regulatory Commission (CERC) allow NTPC to fully pass-through increase in fuel costs through higher tariffs. This puts it on a better footing. Moreover, NTPC has been allocated 10 coal blocks with a production potential of 100 million tonnes per annum, which in due course can cater to about half its existing installed power capacity. Of these, the Chatti-Bariatu mine is expected to start production by the end of 2014-15.
With fuel (coal and gas) costs accounting for up to 60 per cent of net sales for many power producers, access to an assured and viable fuel supply is critical. India’s largest power generator NTPC is best placed on this front. It sources 90 per cent of its coal requirement under fuel supply agreements entered into with Coal India, which ensure certain guaranteed supply. The rest is largely met through imports. Tariffs set by the Central Electricity Regulatory Commission (CERC) allow NTPC to fully pass-through increase in fuel costs through higher tariffs. This puts it on a better footing. Moreover, NTPC has been allocated 10 coal blocks with a production potential of 100 million tonnes per annum, which in due course can cater to about half its existing installed power capacity. Of these, the Chatti-Bariatu mine is expected to start production by the end of 2014-15.
While Reliance Power is largely fuel-secure, a change in Indonesian coal export regulations has affected the viability of its 3,960-MW imported coal-based Krishnapatnam project currently under development. It also awaits gas allocation for its yet-to-be-operational 2,400-MW Samalkot project. That apart, fuel linkages with Coal India, acquisition of captive coal mines in India and mining concessions in Indonesia for both operational and under-implementation projects, provide comfort.
On hot coals
Tata Power and Adani Power, on the other hand, have seen fuel woes affect their operations adversely. Their respective ultra-mega power plants in Mundra, Gujarat, were originally envisaged to be run on cheap imported coal. But consequent to a change in Indonesian regulations in 2011, coal imports from that country turned expensive, rendering operations at these plants unviable. With these plants accounting for half of the companies’ capacity, their consolidated numbers dipped into the red. Also, Adani Power’s 1,320 MW Kawai plant in Rajasthan, which is yet to receive supplies from Coal India, has been forced to rely on coal imports.
Tata Power and Adani Power, on the other hand, have seen fuel woes affect their operations adversely. Their respective ultra-mega power plants in Mundra, Gujarat, were originally envisaged to be run on cheap imported coal. But consequent to a change in Indonesian regulations in 2011, coal imports from that country turned expensive, rendering operations at these plants unviable. With these plants accounting for half of the companies’ capacity, their consolidated numbers dipped into the red. Also, Adani Power’s 1,320 MW Kawai plant in Rajasthan, which is yet to receive supplies from Coal India, has been forced to rely on coal imports.
The recent nod from the Australian Government to Adani Enterprises for developing a 60-million-tonnes per annum coal mine there, can benefit Adani Power. But it will possibly be about three years before production commences. Also, the cost of coal will have to be watched out for.
JSW Energy too runs a substantial 65 per cent of its operational capacity on imported coal. That it sells a large part of its power in the volatile merchant market makes it all the more vulnerable to a spike in fuel costs.
Out on gas
Then, take Torrent Power which has seen nearly 80 per cent of its generation capacity of 2,100 MW turn inoperative over the last two years, consequent to the decline in gas production from Reliance Industries’ KG-D6 block.
Then, take Torrent Power which has seen nearly 80 per cent of its generation capacity of 2,100 MW turn inoperative over the last two years, consequent to the decline in gas production from Reliance Industries’ KG-D6 block.
With State distribution utilities refusing to purchase expensively produced power, using imported natural gas too has not been an option. Torrent Power has also been forced to buy power from outside sources to meet the requirement of its distribution business, significantly increasing its power purchasing costs. Consequently, its profit has taken a big hit in the past two years.
Tariff wars
The extent to which escalating costs can be passed on to consumers has thus emerged as a big differentiator in the power sector. Assured sales to customers at tariffs that are regularly revised to allow cost increases to be passed through, are therefore something to look out for.
The extent to which escalating costs can be passed on to consumers has thus emerged as a big differentiator in the power sector. Assured sales to customers at tariffs that are regularly revised to allow cost increases to be passed through, are therefore something to look out for.
Power plants of Tata Power and Adani Power have borne the brunt of sharply rising imported fuel costs that have surpassed the tariffs they charge. Following the companies’ petition for relief, the CERC allowed them to charge higher tariffs to recover costs.
Following an appeal from the state distribution utilities concerned, the Appellate Tribunal recently upheld (partly) the CERC order. With the distribution utilities likely to challenge this order too, the risk that it may be overturned remains.
But leaving aside the Mundra power plant, a large part of Tata Power’s operations (generation and distribution) are based on tariffs that allow it complete cost pass-through, plus an assured return on equity. Also, long-term power purchase agreements with state distribution utilities ensure guaranteed sales. On the other hand, Adani Power sells most of its power at levellised tariffs with no fuel escalation provisions.
Likewise, recent favourable orders from the Gujarat Electricity Regulatory Commission allowing Torrent Power’s distribution business to charge higher tariffs have come as a big relief for the company. But that alone may not suffice. An increase in gas availability is crucial for growth in power generation by the company.
But, it is the state-owned NTPC which stands out among all. It sells its entire power under long-term contracts and at CERC-determined tariffs that cushion it against rising costs and also provide an assured return.
In contrast, JSW Energy sells up to half its power in the volatile merchant market, exposing it to market-determined tariffs with no assured buyers.
Reliance Power has already tied up with buyers for both its operational and a much larger upcoming generation capacity.
While a part of its operational plants earn regulated tariffs, a large part of the upcoming projects are those that have been competitively bid for. But with factors such as a change in Indonesian coal export regulations implying an increase in future running costs of these plants, Reliance Power has already approached CERC with tariff revision petitions. These have not yet been decided upon.
Foreign exchange risk
The direction of the rupee too can play a big role in the fortunes of power generators. Adani Power and JSW Energy have significant outgoes in foreign exchange, exposing them to any sharp depreciation in the rupee.
The direction of the rupee too can play a big role in the fortunes of power generators. Adani Power and JSW Energy have significant outgoes in foreign exchange, exposing them to any sharp depreciation in the rupee.
Adani Power, for instance, spent ₹5,663 crore, comprising a third of its revenues, in forex during 2013-14. Likewise, in the year before, forex spending accounted for a large 60 per cent of the company’s sales. Ditto for JSW Energy which spent ₹3,110 crore, a large 35 per cent of its revenues, in forex during 2012-13. These expenses have largely been on fuel imports.
What’s in, what’s not
Overall, after weighing all the above, at the current market price of ₹138, the stock of NTPC trades at a reasonable 10 times its consolidated 2013-14 earnings. While NTPC’s earnings will take a hit (as they have in the June 2014 quarter) post the more stringent CERC tariff regulations announced in February, its fundamentals remain strong.
Overall, after weighing all the above, at the current market price of ₹138, the stock of NTPC trades at a reasonable 10 times its consolidated 2013-14 earnings. While NTPC’s earnings will take a hit (as they have in the June 2014 quarter) post the more stringent CERC tariff regulations announced in February, its fundamentals remain strong.
After the sharp rally, at the current market price of ₹74, JSW Energy trades at an expensive 16 times its consolidated 2013-14 earnings. Moreover, its large exposure to the merchant market makes it a risky investment that can well be avoided.
But for the loss-making Mundra plant, Tata Power’s operations are profitable. At the current market price of ₹92, the stock of Tata Power trades at a reasonable 1.6 times its consolidated book value for 2013-14.
A positive ruling on tariff hikes for the Mundra plant will give a big boost to earnings and is one reason for holding on to the stock.
While Adani Power too stands to gain from a favourable tariff order on its Mundra plant, investors could stay away given the other concerns affecting the company. Also, after the recent rally, the stock is trading expensive relative to better-off peers such as Tata Power.
Torrent Power, which is reasonably valued, has gained some succour from recently-passed favourable tariff orders. But an increase in gas availability is crucial, which may be possible only two-three years from now, if domestic gas supplies rise, once the pricing issue is settled.
The laggards
With a major part of hydro power producer NHPC’s planned capacities to be commissioned only after September 2016, revenue growth is likely to be muted over the next two years.
With a major part of hydro power producer NHPC’s planned capacities to be commissioned only after September 2016, revenue growth is likely to be muted over the next two years.
Moreover, given the company’s unimpressive track record in project implementation, investors could exit the stock. Indiabulls Power too, which commenced power generation for the first time last fiscal, has seen many of its project deadlines getting stretched.
While it has fuel supply and power purchase agreements in place for many of its projects, the delays have had a significant bearing on its earnings. It is precariously placed with interest coverage ratio of only 0.3 times.
Transmitting high returns
Do you find the current state of affairs in the power sector somewhat unsettling? If so, you can safely bet on stocks such as Power Grid Corporation of India (PowerGrid). At the current market price of ₹132, the stock trades at 14 times its consolidated earnings for 2013-14 — nearly the same as its five-year average valuation. It is, nonetheless, a decent buy given its growth potential.
Assured returns
PowerGrid has near monopoly on the country’s inter-state and inter-regional transmission network and therefore stands to benefit from the thrust on increasing the country’s power transmission capacity. It has set out a capital expenditure of ₹22,450 crore for the current fiscal and plans to expand its existing inter-regional transmission capacity of 36 GW by 7.3 GW during this period.
PowerGrid has near monopoly on the country’s inter-state and inter-regional transmission network and therefore stands to benefit from the thrust on increasing the country’s power transmission capacity. It has set out a capital expenditure of ₹22,450 crore for the current fiscal and plans to expand its existing inter-regional transmission capacity of 36 GW by 7.3 GW during this period.
Tariffs set by the Central Electricity Regulatory Commission allow PowerGrid a complete cost pass-through plus an assured returnon its commissioned projects. The company’s growth prospects are thus primarily dependent on expansions in transmission capacity, something which it has delivered on. The same is reflected in its rising revenues and profits too. Besides, Power Grid’s foray into intra-state transmission is on track.
Gaining trade
You can also consider investing in PTC India, the country’s leading power trader as also the nodal agency for cross-border power trades. At the current market price of ₹80, the stock trades cheap at about seven times its consolidated earnings for 2013-14, less than half its five-year average valuation.
PTC India buys short-term power surpluses of state utilities, independent power producers and captive power plants and sells them to customers (mainly state utilities) that face a deficit. Besides, it enters into long-term agreements for assured power purchases and sales.
Volume game
Sales under short-term (less than one year) contracts account for close to 60 per cent of the volumes. With margins on short-term trades capped at 7 paise per unit and actual margins earned being even lower, volume growth holds the key to higher revenues.
Sales under short-term (less than one year) contracts account for close to 60 per cent of the volumes. With margins on short-term trades capped at 7 paise per unit and actual margins earned being even lower, volume growth holds the key to higher revenues.
For the nine-month period ended December 2013, PTC India traded 27,645 million units, up 30 per cent from the year-ago period. With a 30 per cent share in the short-term power market, PTC India is well placed to benefit from the power demand-supply imbalance in the country.
Healthy performance of the subsidiary PTC India Financial Services too provides strong support.
(This article was published on August 10, 2014)
http://www.thehindubusinessline.com/features/investment-world/power-upwithout-shocks/article6301355.ece?homepage=true
