Power: Quarterly Results Preview (Jul – Sep’19) – Challenging quarter, but long-term view intact

Though beset with several challenges, power generation (ex-renewable energy) in India continued to grow during Q2FY20, albeit at a slower pace. Generation in H1FY20 was up 3.5% YoY (thermal power up 0.9% YoY). For 5MFY20, demand growth remained robust with base demand rising 5.3% YoY while peak demand grew 5.9% YoY. Growth during the period was maintained despite 1.6% decline in base demand in Aug’19 due partly to seasonality and partly to introduction of LC mechanism. The quarter gone by has been challenging for the sector owing to: 1) reduced coal supplies due to floods in a number of states, 2) states dishonouring PPAs, and 3) rise in discom dues despite LC mechanism coming into effect. On the other hand, positives include lower cost of power procurement due to lower international coal prices and higher hydro power generation.

Q2/H1FY20 overview:

• H1FY20 has been tough for Coal India, with production/offtake declining 6.5%/5.4% YoY to 241mnte/275.8mnte (for Q2FY20, production/offtake was down 13%/10.8% YoY) respectively. The company had to cope with several problems: 1) coal worker union strikes in the last week of Sep’19 (resolved), 2) niggling issue with local populace continuing to disrupt operations at Talcher (MCL), and 3) flooding at mines of MCL, WCL and SECL due to heavy rainfall in Central, Western and Eastern India. Nevertheless, the management remains confident of clocking 630mnte offtake for FY20, which will require a growth of 12% in the second half of the fiscal.
• 3,620MW generation capacity (including renewable energy) has been added to the sector in Jul-Aug’19. During 5MFY20, thermal PLF has been 58.95%, down 52bps YoY. Renewable energy generation (solar+wind) growth did not keep pace with overall growth during 5MFY20, being up merely 4.9% YoY (mainly coming from solar, up 27.8% YoY) while wind generation declined 3.6% YoY. Major reasons for the tepid growth were: variation in wind speed and issues related to offtake by states (after Andhra Pradesh, now Uttar Pradesh too has decided to stop procuring electricity from 650MW wind power plants from 1st Oct’19 onwards).
• For companies in our coverage universe, we expect NTPC, Power Grid (PGCIL) and Torrent Power to lead the earnings expansion. NTPC’s earnings re-basing is likely to continue (on abatement of fixed-cost under-recovery, which has reduced to Rs8bn in FY19 vs Rs11bn annualised in FY18). PGCIL’s secular earnings growth too is likely to have continued (driven by strong asset capitalisation) though its outperformance will only be seen when its non-regulated debt declines. NTPC continues to operate below its potential due to coal availability issues from Coal India as a result of heavy rains (the shortfall of fixed cost is expected to be recovered by Q4FY20).
• For Coal India, although offtake was low during the quarter, the company has been able to increase supply volumes to non-power consumers, which commands higher premium than power FSA. Also, the latest change in tax rate will provide significant fillip to profitability, since Coal India was hitherto a full tax paying company.
• Among IPPs, we expect only JSW Energy to outperform mainly due to higher hydro generation and lower cost of imported coal. CESC is expected to report a slight decline in profits while Torrent Power’s profit will likely decline on account of a one-off gain in Q2FY19. Tata Power’s standalone profitability is to likely increase while its consolidated profit will remain muted due to lower international coal prices.

  Q2FY20E result estimates

Source: I-Sec research

Please find attached report.

Source: icicisecurities