Power Sector - Results Preview - Higher Fuel Cost & Muted Demand Growth to Impact Profitability - Reliance Securities

Result Expectations / Sector Preview

Power Sector witnessed decent growth in generation (5.2%) yoy in 3QFY17 compared to marginal 1.3% growth in 2QFY17 on the back of improved system demand. All-India generation in Oct-Dec'16 quarter rose by 5.2% yoy to 288bn units (BUs) and thermal generation rose by 5.1% yoy. Hydro generation grew by 4.5% yoy due to decrease in reservoir levels. All India PLF for thermal sector stood at 63.3% in 3QFY17 compared to 64.0% in 3QFY16. In our view, improving industrial demand along with improving financials of the state-run power utilities expected to improve power demand.

Spot Global Coal Prices Stable in 3QFY17, Albeit Higher on yoy Basis

Average price of Indonesia Coal Reference Index, HBA Marker stood at US$85 per tonne in 3QFY17 vs. US$57 per tonne in 3QFY16 on account of cut in mining output and demand revival. Low demand due to cold wave in Northern India and congestion in Inter-State Transmission Networks impacted short-term power market volume. Average Market Clearing Price (MCP) for the period was Rs2.34 per unit, which is ~12% less than last year.

Power Sector

Our Power Sector coverage universe is likely to report a decline in a revenue growth to the tune of 3.3% yoy in 3QFY17E owing to new accounting standards IND-AS. Profitability of power companies is expected to be lower barring PGCIL & Tata Power. The industry would continue to face challenges like lower PLF and lower system demand. The private players would continue to show low profits due to legal disputes relating to coal pricing and supply issues. Amongst regulated players, PGCIL is likely to report strong numbers driven by higher capitalisation and full benefits of higher commissioning in 1Q & 2QFY17, while adjusted earnings of NTPC expected to improve owing to improved PLFs, higher incentives and increase in regulated book on account. Tata Power's consolidated PAT - before comprehensive income - is expected to improve owing to lower MTM losses at Coastal Gujarat Power (CGPL) and better operating performances by key subsidiaries and Indonesian coal mines. Net loss of KSK Energy & Adani Power is expected to shrink aided by higher PLF and improved realization. JSW Energy's revenue and earnings are likely to be negatively impacted by lower realisation, higher interest and depreciation despite higher generation. JSW Energy is likely to be impacted by under-utilization of its Vijaynagar plant.

EBITDA margins for our coverage universe would continue improve by 70bps owing to improved realisation. Owing to higher regulated equity, improved realisation, NTPC's operating margin rose by 187bps to 28.4%. PGCIL is expected to show stable margin in 3QFY17.

Companies like JSW Energy, Tata Power, KSK Energy & Adani Power are expected to witness decline in margins on account of higher fuel cost. However, CESC is likely to show improvement in margins on account of higher generation and lower spot coal purchases. On account of sharp decline in e-auction price yoy, higher employee cost and other expenses, net profit of Coal India likely to decline by 17.7% yoy in 3QFY17.

Sectoral Outlook

Recently launched UDAY scheme deadline by Mar'17 has seen positive response from DISCOMs and should eventually result in their improved financial health and ability to procure more power. Despite lower per-capita power consumption as a demand-driver, subdued economic activity has led to lower power demand from the industrial consumers, which has led to the SEBs shedding load to residential and agricultural consumers. However, we believe that improvement in policy environment and infrastructure spend coupled with manufacturing activities will aid in reviving the demand environment for the power sector. In our view, implementation of UDAY scheme is expected to improve power demand in FY18E, while increase in coal output would provide a much needed fillip to the sector.

3QFY17E Result Pick - PGCIL

Revenue is expected to be higher on capitalization of assets, while EBITDA margin is likely to remain stable driven by power transmission business.

Source : Equity Bulls

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