| Summary of Contents
| THEMATIC REPORT Switch from Reliance Power to NTPC or CESC depending on your risk profile Prefer NTPC, CESC: We have compared Reliance Power with NTPC and CESC on various parameters like operational efficiencies, progress on expansion, balance sheet strength, risk and prevailing valuations. Given the multiple concerns for the power generation companies (like coal linkage, execution delays, forex fluctuations etc), we believe it is better to stick with companies with power generating assets (that provide free cash flows), assured returns and higher certainty of future earnings. Thus, it is better to switch from Reliance Power to NTPC (for conservative investors) or CESC (for more aggressive investors). Key points -
Reliance Power - execution delays and uncertainty of coal usage issues: Reliance Power is having just 600 MW of operating capacity currently and expects to add 1200 MW in the next one year period. The company has an ambitious plan to add above 18000 MW in future. However, two major developments have turned negative for company; which in effect are likely to delay or bring uncertainty in the execution of two of its projects. -
NTPC - high return ratio with large generating assets: NTPC is the largest power generating utility in India and also one of the most efficient players. We like its large operational assets which are generating healthy cash to fund future growth. Moreover, with it having a FSA with Coal India, it has relatively high safety of coal supply. Also, the assured high return on equity (RoE; 14%) which could be sustained despite capacity addition is difficult to ignore. -
CESC - extremely attractive valuations; retail spin off is additional trigger: CESC is one of the cheapest utility stocks available in the Indian market, despite it being one of the most integrated utilities. We believe the discount in its valuation is overdone as the financial health of its retail business is improving since FY2011. Further, a possible break even of the retail segment by FY2015 coupled with growing scale of the utility business would consequently reduce the impact of the retail business' drag on the overall balance sheet of the company.
SECTOR UPDATE Power Shunglu panel suggests steps to end power sector's woes
Power distribution has turned out to be the rusted part of the total power sector value chain. The mounting losses of the state electricity board (SEBs) are now affecting the entire sector. Given the severity of the situation, the prime minister under the aegis of the Planning Commission appointed a high-level panel led by VK Shunglu, former head of the Comptroller and Auditor General of India (CAG), to look into the financial problems of the SEBs and suggest corrective steps. The entire report could be summarised in two parts: (1) highlighting the messy financial status of the SEBs across the country and the reasons behind the same; and (2) recommendation of measures for both the immediate issue and the long-term issues.
Key recommendations
View: We believe the SPV route suggested by the panel would help to immediately clean up the accumulated losses in the form of bad loan in the books of banks; it will be positive for banks (especially the public sector banks), Power Finance Corporation and Rural Electrification Corporation. Also, the proposed regular revision in the tariffs would check the losses. We believe the committee has rightly weighed and criticised the existence of managerial or operational inefficiency which should not be offset using tariff hikes always. Hence, simultaneously several steps have been recommended to improve the efficiency in the long term. However, we believe it will be a challenge to implement the recommendations especially the one to improve efficiency. Some of those may require political will too at the local or regional level, which could be a time-consuming process if undertaken. | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | |
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