Moneycontrol Bureau
Plagued by policy paralysis earlier and now in the midst of a coal block allocation scam, it has been a bumpy ride for India's power sector for quite sometime now. With the new pro-reform government completeing first 100 days in office and the Power and Coal Minister Piyush Goyal assuring to rationalise coal supplies and implement long term measures to raise output, is the worst behind us? Almost yes, says research firm CLSA.
In a recent report, CLSA says, "An analysis of the balance sheets of 11 power companies, which constitute 35-40 percent of outstanding credit to the sector, indicates that most of them are cutting capex aggressively. At the same time, commissioning of new projects is helping boost their EBIDTA margins."
Going ahead, one should expect significant improvements in their balance sheets (better net gearing and net debt / EBIDTA ratios over the next couple of years) if Coal India’s output growth picks up along with power demand, it adds.
But for now, the Supreme Court’s decision on coal mine allotments and “compensatory tariffs” will severely affect some players. "If Supreme Court decides to cancel all allocations the EBIDTA growth estimates for independent power producer (IPPs) and subsequent reduction in gearing levels would be at risk. Similarly, if companies like Tata Power and Adani Power are not allowed to recover compensatory tariff, the EBIDTA growth estimates for IPPs will get downgraded," it says.
Top bets
CLSA has a buy rating on Power Grid with a price target of Rs 162 per share as it expects a 17 percent compounded annual growth in EPS over FY15-17.
Among Independent Power Producers, JSW Energy and CESC are its preferred picks. JSW Energy is a play on weak international thermal coal prices and strong merchant power tariffs. Rs0.2/kWh increase in short term tariff assumption leads to 12-15 percent upgrade in earnings over FY15-17, CLSA says.
CLSA has upgraded CESC to a buy and expects the company's consolidated earnings to treble over FY15-17 as the new power projects ramp-up and retail business achieves break-even.
(Posted by Harsha Jethmalani)
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