Expect merchant power rates of Rs 3.2/unit in FY13: Emkay

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Expect merchant power rates of Rs 3.2/unit in FY13: Emkay

Emkay Global Financial Services has come out with its report on power sector.

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NHPC BSE | NSE 29/05/12 Are Mutual Funds betting on NHPC? Other Stocks in this news Adani Power | NTPC |

Emkay Global Financial Services has come out with its report on power sector.

50% of contracts are 'less than a week' contracts - buyers shying away: In CERC's May 2011 report, more than the price what's important to note is >50% of the contracts are 'less than a week' contracts and the contract volumes have declined and are at 18% of April month contract volumes only. This means that buyers are shying away from entering into '1 week +' contracts - after effects of exchange prices consistently being lower than bilateral prices for past one year.

September 2011 prediction at Rs3.58/unit: Other Observations - (1) 65% of contract volumes signed in May 2011, is at Rs3.58/unit and only 5% of volumes are at higher than Rs4/unit and (2) August 2011 price is predicted to be Rs3.84/unit and September even lower at Rs3.58/unit. Though we believe, below average monsoon might be a positive for the merchant market, capacity additions are likely to make up for most of the shortfall in hydro generation (if at all).

May11 contract volumes at just 18% of Apr11: CERC had reported huge volumes Apr11 of 9.3bn units vs 1.4bn units contracted in Mar11. However, we believe that since most of these contracts were for one month (delivery max up to May 2011), these were driven by state elections (5 states in April and May). As per our expectations contract volumes have come down to 1.7bn units in May11.

Merchant power prices are headed towards Rs3.2/unit in FY13E; Stick to regulated utilities; Top pick - NHPC : FY11 bilateral merchant prices stood at Rs4.7/unit mainly driven by prices in first 6 months. After analyzing (1) electricity demand, (2) supplies scheduled and (3) state distribution company losses - we believe that merchant power prices including bilateral are headed towards Rs3.5-3.7/unit (average) in FY12E and Rs3.0-3.2/unit in FY13E. Our estimate of sustainable merchant power prices stands at Rs2.7/unit (tariff at which discom's losses do not increase) beyond FY13E.

We reiterate negative view on private power utilities (except Reliance Power) and prefer regulated utilities. Our top sell is Adani Power (valuations do not price in risks and recent negative news flow). Reliance Power (huge captive fuel at cheap cost) is our top pick in private utilities space. We like regulated utilities for there defensiveness, decent growth in next five years. NHPC (Valuations comfort, regulatory triggers and commissioning pick up) in our top pick in regulated utilities space, followed by power grid (low risk, reasonable returns) and NTPC (lower risks, reasonable valuations and improving execution) in the same order.

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