Power and Oil & Gas Utilities - Q4FY14 Results Preview - Strong earnings quarter - Centrum

Power and Oil & Gas companies under our coverage are expected to report strong sets of earnings in Q4FY14. Demand for power picked up selectively and hence Plant Load Factor (PLF) bounced back whereas improved coal supplies led to a pick-up in Plant Availability Factor (PAF). Global coal prices continued to remain weak. Demand for RLNG continues to be weak although pick up in utilization at Dahej terminal was primarily owing to momentary decline in gas output led by ONGC. LPG realizations jumped whereas petchem realizations moderated. Our preferred pick remains MRPL and recommend HOLD on Tata Power, Petronet LNG, GAIL and GSPL and SELL on PTC India.

- Positive earnings surprises: MRPL, NTPC, Tata Power, PTC India, Petronet LNG, GSPL and GAIL are expected to post positive earnings surprises led by higher Gross Refining Margins (GRM), robust PLF and PAF based incentives, modest coal realizations, increased trading volumes, bounce back in utilisation rates at Dahej LNG terminal, modest recovery in transmission volumes and higher LPG/LHC prices.

- Gas utilities - GAIL on a high: GAIL's earnings would be robust aided by higher LPG/LHC realizations, zero subsidy and weak rupee. This is despite subdued transmission earnings, dent in petchem earnings and moderation in gas trading/marketing. For GSPL, we see marginal sequential bounce back in volumes to 20.5 MMSMCD and stable tariffs. For Petronet LNG, lower domestic gas output led by ONGC led to some demand recovery of RLNG at Dahej thus leading to higher sequential capacity utilization. However, demand back down by FACT at Kochi would lead to sequentially higher under-recovery of fixed costs and hence earnings will remain subdued.

- Power utilities - NTPC to veer up: Higher PLF and PAF are key positive surprises for NTPC. For PTC India, skewed sales volume mix towards IEX will drain core EBITDA while non-receipt of dues of Rs2.5bn from TNSEB and hence surcharge income will remain an overhang. For Tata Power, we expect earnings to bounce back led by reversal of MTM losses and higher dividend receipts from coal business.

- Recommendation and key risks: We downgrade Tata Power to Hold with a revised PT of Rs85 on the back of 14% equity dilution and intermediate roadblocks seen ahead in implementing CERC's compensatory tariff order, although we continue to factor-in this tariff order. We downgrade PTC India to SELL as the stock being high beta has moved up ahead of its fundamentals and its skewed business model is being ignored currently. We recommend BUY on MRPL, and HOLD on NTPC, Petronet LNG, GAIL and GSPL. Key risks to our thesis are (1) regulatory changes; and (2) lower-than-estimated volumes/realizations.

Source : Equity Bulls

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