The power capacity addition based on CIL?s coal linkages is expected to be ~40 GW over FY11-14E. This will require ~200 mtpa of additional coal to operate at 85% plant load factor (PLF) . However, the incremental coal availability (assuming 8% growth by CIL from FY13) is estimated at ~73 mtpa, implying 40% average PLF for these new capacities.
Given the imminent coal crunch, new capacities will either function at suboptimal PLF or have to blend imported coal in high proportions between FY12 and FY16, thus raising costs and eating into margins.
Private independent power producers/captive power plants that have committed to supply power from upcoming capacities under Case-I bidding at preset rates or on merchant basis, face maximum risk of fuel cost escalation. While these projects can import high-cost coal, the impact on their earnings could be significant as higher costs cannot be passed on via tariffs.
We find Adani Power (APL) to be the most impacted by these conditions. JSW Energy (JSWEL), in contrast, has maximum dependence on spot imports of coal and spot (merchant) sale of power, exposing it to volatility in both coal and power prices. Power from APL?s upcoming 6 GW capacities (based on 70% linkage coal) has been sold on Case-I bid rates with fixed escalation rates for 25 years. So the company will be exposed to higher imported coal costs during the coal crunch. JSWEL, on the other hand, is dependent on spot imports of coal in the absence of any firm coal tie-up while it sells most of its power on merchant basis, exposing it to volatility in both coal and power prices.
NTPC is equally at risk since its new projects also have a lower coal supply commitment from CIL. This, coupled with challenges in inland transport, may lead to deficient coal supply to its new plants. NTPC so far has been successful in achieving 6-7% blending of imported coal. Assuming the company?s existing capacities blend imported coal at 15%, this excess domestic coal freed by NTPC can be allotted to new capacities. Even in this optimistic scenario, the available coal can run new capacities at only 52% PLF in FY14.
Although we like APL?s integrated business model and execution capabilities, we fear earnings growth could be hit in FY13 and beyond (FY13E PAT estimated at R2,200 cr against consensus of R3,100 cr) and, thus, valuations.
We are negative on JSWEL due to potential earnings downgrade, driven by its inability to pass on high fuel costs and moderating merchant prices. We prefer integrated companies that have enough cost pass-through clauses in tariffs as these impart earnings visibility. Tata Power remains our top pick in the space (SOTP fair value of R1,361). We initiate coverage on Adani Power and JSWEL with a ?reduce? recommendation and a relative rating of ?sector underperformer?.
?Edelweiss