Given continued sluggish demand growth of 3.8% YoY in Q3FY11, power deficit in India dropped to 7.2% from 9.6% in Q3FY10. This impacted merchant realisation ? merchant rates are hovering at Rs 4/KwHr. Further, the recent sharp rise (28% in the past two months) in international coal prices added to the pain for players dependent on spot coal while it benefited players with net long exposure on coal.

Also, weak demand growth has impacted plant load factor (PLF) ? the average PLF for I-Sec Power universe dropped to 80.8% in October-November 2010 from 83.2% in October-November 2009. PLF fell for the entire I-Sec Power universe excepting CESC. RPower?s Rosa project which is facing coal shortage and has reported a PLF of 52%.

Further, capacity addition was healthy at around 5% for the I-Sec Power universe in Q3FY11 ? NTPC (500 MW), Adani Power (APL, 990 MW), JSW Energy (435 MW). We continue to be negative on players with exposure to merchant prices and spot international coal price. We reiterate sell on Reliance Power (RPower), APL and JSW Energy. We are positive on power distribution companies such as CESC and Reliance Infrastructure (RInfra) due to attractive valuations and improving distribution businesses.

Sharp rise in coal prices imply higher realisation at Bumi, thus benefiting Tata Power and offsetting the negative impact from lower volumes. Further, JSW Energy will be impacted from rising coal prices as it sources most of its coal from spot market and energy cost is not a pass-through.

Capacity addition has been healthy in Q3FY11 ? the I-Sec Power universe added around 5% capacity, with NTPC, APL and JSW Energy adding 1,925 MW. Further, JSW Energy?s Rajasthan project is facing issues such as land acquisition for Jalippa coal mines, thus delaying the entire project.

We expect NTPC and JSW Energy to report a YoY decline in profitability.

NTPC will likely be impacted by lower other income and lower return in core business as it has to pass on tax-incentive to state electricity boards.

JSW Energy may be impacted by higher fuel cost and lower merchant rates. CESC is expected to report strong quarter with increased regulated equity base and benefit of new tariff order. Tata Power is expected to report sharp jump in profitability owing to low base and higher coal realisations.