Seventeen States have joined the SEB debt restructuring proposal (UDAY) introduced by the Centre in Nov 2015. A 9% y-o-y rise in Q1FY17 power demand is coupled with lesser delays in SEB payments. Solar power tariffs are bouncing from lows of Rs 4.34/unit to Rs 4.78/unit. 4,830MW has been awarded on solar in the last 12 months, while private sector thermal addition plans are muted as M&A focus continues. We remain positive on NTPC and Power Grid (PGCIL).
State Electricity Board (SEB) reforms directionally on-track
71% of SEB debt has been covered under UDAY with 17 states joining it. Tamil Nadu, West Bengal, and Delhi are the major states with SEB debt (18%) which are yet to join – all 3 non-BJP governments. Tamil Nadu, the 2nd highest contributor to SEB debt, has been making negative soundbytes on the scheme. We still believe that incremental losses being a part of FRBM targets materially only from FY20E is a dampener (Door open for back ending reforms dated 11th June 2015). However, in the medium-term it does point to strengthening of the weakest link in the power chain.
Recent solar bids at 8% premium to lows
Solar and Wind power plants are continuing to pick up pace. V/s 5,130 MW installed solar capacity, 4,830 MW has already been ordered out in the last 6 months. We remain positive on renewable capacity addition: Renewable Energy – Opportunity (III) dated 24th June 2015. However, viability and execution of projects became a concern given the aggressive bidding. Positively, recent Karnataka auctions have seen bid rates rising. SunEdison’s April 2016 bankruptcy protection filing has clearly had an impact. Our interactions with power companies suggest that more rational bidding will be seen going ahead. R4.95-5.00/unit is a more comfortable price point that industry experts have been discussing.
Power demand and PLF utilisation rise in Q1FY17
Three regions—North, West and South— account for 87% of power demand in India. Power demand recovery continues from 0.7% y-o-y growth in FY15 to 4% in FY16 and 9% y-o-y in Q1FY17. Household consumption driven by consumer durables has been a driver, with sharp rise in industry requirements still awaited. All-India power supply y-o-y growth at 11% has been stronger than demand growth, leading to power deficit being at the lowest levels in the last 25 years at 1%. Thermal power plant utilisation levels are at 63.4% vs 62.0% y-o-y.
NTPC and PGCIL to gain from stable earnings profile and SEB reforms
NTPC and PGCIL should comfortably meet earnings expectations in Q1FY17e given the regulated nature of their business. Competitive bidding is picking up with a rise of 6x in FY16 (Transmission Projects — Competitive bids up 6x dated 6th Jan 2016). While for PGCIL this will be less than 10% of gross block even by FY20e, we believe with every passing year PGCIL will see some of this risk gradually being factored in valuations. We have rolled over to valuing PGCIL at 1.8x PB FY18E, vs 2x FY17E earlier, and marginally adjusted our estimates factoring in Q4FY16 results. We believe NTPC will be a bigger beneficiary from power sector reforms and power demand recovery.