Power and Gas Utilities - Q3FY14 Result Preview - Mixed bag - Centrum

Power and Gas utility companies under our coverage are expected to report a mixed bag of earnings in Q3FY14. Demand for power picked-up selectively and hence PLF bounced back. PAF was stable and there was modest recovery in global coal prices. Rupee was stable but demand for RLNG was weak, domestic gas flow declined led by RIL KGD6, while Petchem / LPG realizations were higher. Our preferred pick remains NTPC and recommend HOLD on Tata Power, Petronet LNG, GAIL and GSPL and SELL on PTC India.

Positive for some but negative for rest: NTPC, Tata Power and GAIL are expected to post positive earnings surprises led by higher demand, robust realizations, zero subsidy-burden and reversal of MTM forex losses. Whereas, GSPL, Petronet LNG and PTC India are expected to post negative earnings surprises led by lower demand and hence capacity utilization, under-recovery of fixed costs at Kochi terminal and volume sales mix skewed towards IEX / PXIL and thus leading to a dent in core margins.

Gas utilities – Negative surprise for some: GAIL's earnings will rebound as Petchem and LPG/LHC earnings will shine aided by higher realizations, zero subsidy and weak rupee. This is despite subdued transmission earnings and moderation in gas trading / marketing. For GSPL, we see de-growth in volumes (YoY and sequentially) to 20 MMSMCD and hence earnings. For Petronet LNG, we see weak demand adversely impacting capacity utilization, which, coupled with under-recovery of fixed costs at Kochi, could keep earnings under pressure.

Power utilities - NTPC on a high: The use of imported coal and higher coal availability coupled with selective pick-up in demand by SEBs from Nov-13 are key positive surprises for NTPC. For PTC India, skewed sales volume mix towards IEX will drain core EBITDA while non-receipt of dividend will drag PAT sequentially. For Tata Power, we expect earnings to be flat as under-recovery of cost continues at Mundra UMPP coupled with subdued coal realizations. Earnings may surprise with the reversal of MTM forex losses.

Recommendation and key risks: We upgrade NTPC to BUY maintaining our PT of Rs165 on the back of stock price over-reacting to draft CERC tariff norms, attractive valuations (trading at Mean-SD) and stable business model. We upgrade Petronet LNG to HOLD as the stock has corrected but maintain our price target of Rs 110. We downgrade Tata Power to HOLD after a stellar stock performance of 23% since our IC report in Sep-13 to meet our base case PT of Rs90. We recommend BUY on NTPC, SELL on PTC India and HOLD on Tata Power, Petronet LNG, GAIL and GSPL. Key risks to our thesis are (1) regulatory changes; and (2) lower-than-estimated volumes and realizations.

Source : Equity Bulls

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