the bids, we believe these plants will be loss-making, with the potential of debt repayment also being a question mark. While one can debate whether any relief should be given, these groups will account for about 25% of upcoming power capacity (excluding renewables), apart from banks having an exposure of more than $2-3 bn in these non-viable plants.
Reported financials of Tata Power and Adani Power provide ample evidence on the financial strain due to non-viable power plants. These companies along with Reliance Power are currently involved in tariff revision negotiations. Clearly, if there is no resolution, setting up incremental power capacities for these companies would be tough, going forward.
While one could argue that these companies are suffering due to their aggressive bidding, statistics show that they account for 25% of the incremental capacity addition, 10% of overall India’s capacity and closer to 15% in terms of generation, cannot be ignored. This is further accentuated by the banking sector’s exposure and the criticality of power availability in India, especially given the deficit prospects.
Power demand; a critically watched element: In two of the three periods when GDP slowed sharply in the past 20 years, power demand rose by 8-10% year-on-year, while in one instance it rose 3% y-o-y. Power demand rose by 7% y-o-y in April-May 2013, and has been negative for June-July 2013. However, June-July 2012 had a high base effect with a 13% y-o-y rise in demand vs the 7% y-o-y demand rise for FY13 . With slowing GDP growth, power demand would be lower than previous peaks of 9-11%. However, backed by household consumption of electricity, FY14 demand could be potentially higher than the 3% seen in Apr-July 2013.
Ports demand still subdued: All-India cargo growth at major ports declined in April-May 2013 despite the low base effect and y-o-y decline in April-May 2012. Some uptick has been seen in June-July 2013, driven by thermal coal. We believe growth will be at sub-5-6% levels, compared with 8% levels in earlier years, given the sharp slowdown.
Buy Tata Power, Power Grid; upgrade Adani Ports to Hold from Underperform: Earnings volatility is limited for these companies compared with E&C(engineering & construction)/capital goods companies. We have reduced our price targets by 5-15%, and within this, we prefer Tata Power and Power Grid, given their stronger earnings traction on company-specific events and execution.
We have cut our FY14e and FY15e estimates for Tata Power, factoring in