Companies & Sectors
Utilities: Religare says PLFs up; Macquarie finds fuel concerns rule investor mindset

 In two separate reports, broking firms Religare and Macquarie talk about rising PLFs in October and concerns of global investors about fuel supply risk and the increasing losses by state electricity boards. Both agree that merchant power prices will be under pressure

In a recent report to its institutional clients, Religare Research has said that the PLFs (plant load factor) of private power plants has shown strong improvement, but that in absolute terms, public sector power plant PLFs continue to be higher. "Average thermal PLF of power companies under our coverage increased to 84.6% in October versus 75.3% in September. Private power plants showed the strongest improvement at 76.3% against 64.8% in September, while the PLF of central power plants increased from 77.5% to 86.5%," Religare said in a report dated 10th November.

Adani's Mundra plant PLF improved to 91% in October versus 81% YTD. Jindal Steel & Power's Tamnar plant's PLF improved to 103% versus just 75% YTD. Lanco's Kondapalli and Amarkantak plant showed a 5% and 16% improvement in PLF, respectively, while its smaller Aban plant showed a 24% improvement. NTPC's Korba, Rihand, Faridabad, and Kawas plants showed improvement too.
However, in NTPC's case there was also a drop in PLF at quite a few of its plants. "NTPC's coal-based plants (~25.3GW) averaged 88.6% and gas-based units (~4GW) remained at 73.1%," Religare said. Reliance's Rosa plant improved only slightly. Tata Power's plants showed virtually no improvement.

Religare said OTC prices for Oct/Nov/Dec are expected at ~Rs 4.62/4.65/4.75 per kWh-virtually unchanged from September. While merchant power volumes continued to rise, the trend in tariffs continued to be downward. Prices of coking coal (Newcastle, South Africa) have been rising, while freight rates have picked up sharply since June.

Macquarie has said that most investors it met with recently in Asia, Europe and the US to talk about Indian utilities, were underweight the sector on concerns around fuel supply risk and increasing losses by state electricity boards.

In its report dated 10th November, Macquarie said that after the Coal India initial public offer investors have become very aware that there is a widening demand-supply gap for coal in India and that coal linkages are clearly not enough-a case in point being Lanco's 600MW Amarkantak project which has had to resort to e-auctions despite having linkages with Coal India. The brokerage perceives sole reliance on coal linkages as a big risk and as such finds NTPC in a precarious position.

Among the power companies positively placed in terms of fuel supply security it has called attention to Adani Power (since its parent is the country's largest coal trader, is a coal producer, and a greenfield asset owner and contract miner), and Tata Power since it is "the only utility with a net-long thermal coal position (17-19mtpa to FY17)."

On the losses by state electricity boards (SEBs), Macquarie said that the 13th Finance Commission Report projected state transmission and distribution power losses at $26 billion by FY15. "This weighs heavily on the SEB's appetite to acquire more expensive power as more merchant volume is fed into the power market. Macquarie Research and power traders we spoke too think this will continue to put pressure on merchant power prices-look for greater volume exposure than purely pricing exposure."

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).


Monday’s Market Preview: Flat-to-positive opening likely

The Indian market is likely to witness a flat-to-positive opening on the back of mixed global cues. Wall Street ended sharply lower on Friday as the Group of Twenty (G-20) meeting failed to come up with any constructive understanding at the end of two-day meeting over the weekend. Markets in Asia were mixed despite higher-than-expected gross domestic product (CDP) numbers for the September quarter. The SGX Nifty, which opened strong, pared early gains and was just 1.50 points higher at 6,085.50 compared to 6,084 on Friday.

The aftermath of the festive season proved costly for investors as global cues, weak domestic industrial growth numbers for September and mixed earnings reports trashed the indices last week. Pullout by foreign institutional investors also weighed on the markets. The Sensex and the Nifty both closed with cuts of around 4% on a weekly basis.

Markets in Asia were mixed in early, despite better-than-expected GDP numbers for the September quarter. GDP rose an annualized 3.9% in the three months ended 30th September, following a revised 1.8% expansion in the previous quarter, the Cabinet Office said in Tokyo today. In nominal terms, the economy grew 2.9%.

The Jakarta Composite was up 0.04%, the KLSE Composite gained 0.19%, the Nikkei 225 surged 0.71%, and the Seoul Composite was up 0.32%. On the other hand, the Shanghai Composite declined 0.85%, the Hang Seng fell 0.01%, the Straits Times was down 0.46% and the Taiwan Weighted fell 0.88% in early trade. The SGX Nifty, which opened strong, pared early gains and was just 1.50 points higher at 6,085.50 compared to 6,084 on Friday.

The US markets declined on Friday again to end the worst week in the last three months. With the Group of Twenty (G-20) summit of not much use to the US as it failed to persuade world leaders to come up with plans to strengthen global growth, the markets ended lower. The markets also took a hit from the Chinese market as the government there said that the pace of inflation hit a more than two-year high in October, raising speculation that China would hike rates to ease inflation. The Dow tumbled 90.52 points (0.80%) to 11,192. The S&P 500 declined by 14.43 points (1.18 %,) to 1,199. The Nasdaq fell by 37.31 points (1.46%) to 2,518.

In a late night development on Sunday, controversial telecom minister A Raja submitted his resignation after being ordered to do so by his party, DMK, in the wake of allegations that he caused a loss of Rs1.76 lakh crore to the exchequer while allocating second generation (2G) spectrum two years ago.

The resignation was submitted after he returned to Delhi from Chennai where he met the party chief and state Chief Minister M Karunanidhi twice in the last 24 hours.

Prime minister Manmohan Singh is expected to handle the telecom portfolio in the interim period till a new minister is appointed, sources indicate.


Weekly Market Report: Bulls shaken, will they be stirred?

The aftermath of the festive season proved costly for investors as global cues, weak domestic industrial growth numbers for September and mixed earnings reports trashed the indices this week. Pullout by foreign institutional investors also weighed on the markets.

The markets opened higher on the first day of the week, riding on the festive euphoria of the previous week but profit-taking after the recent rally led the indices lower at the end of the session. The indices started lower on Tuesday; however, buying on select counters amid volatile trading ensured a positive closing.

The consolidation, which began on Wednesday, continued till the end of the trading week. Nervousness in the global market played on investors' minds leading to a flat closing with a negative bias for the domestic market. The downturn on Thursday was steeper as even the easing of the weekly food inflation numbers offered no respite to the market. On Friday, the Sensex witnessed its worst weekly fall since 1st June, plunging 2.10%, on weak global cues and poor industrial growth numbers for September.

Food inflation for the week ended 30th October stood at 12.30% against 12.85% in the previous week, on improved supply of items, showing a downward movement for the fourth straight week.

Considering that food inflation stood at a high of 12.59% during the corresponding week of last year, even 12.30% inflation is quite elevated.
Industrial growth declined the most in 16 months to 4.4% in September, reflecting a slowdown in demand across sectors, as interest rates rose in response to the Reserve Bank of India's tight monetary moves.

Finance minister Pranab Mukherjee has expressed concern at the sluggish pace of factory output, but reserved detailed comments for want of in-depth analysis. However, many experts remain positive on industrial growth numbers for the next few months due to the festive season and prospects of better farm produce.

Auto sales continued to break records for the fourth consecutive month in October with the Society of Indian Automobile Manufacturers (SIAM) stating that total vehicles sold in the country last month at 14,60,655 units was better than the mark set in September this year. The industry had witnessed total sales of 13,29,086 units in September this year.

Overall vehicles sold in the domestic market during October grew by 45.93%, from 10,00,953 units in the same month last year.

The Reserve Bank of India (RBI) has expressed concern over the falling credit offtake, which slipped to a poor 16.6% in the last fiscal. Noting that there has been steady decline in credit growth since FY04-05 when it had touched a high of over 30%, credit offtake declined to a low of 16.6% in the fiscal ending March 2010, RBI said in its statutory 'Report on Trend and Progress of Banking in 2009-10'.

It further noted that the slipping credit growth was also a reflection of slowing deposit growth.

On the international front, global leaders at the Group of Twenty (G-20) at the end of their two-day meeting on Friday pledged to refrain from competitive devaluation of their currencies and to take steps to mitigate risks arising from excessive capital flows to emerging markets. The "Seoul Action Plan" called for moving towards more market-determined exchange rates.

The declaration comes amid a currency war between the US and China, which also had ramifications for India and several other countries in terms of their exports becoming uncompetitive.

The G-20 group includes India, the US, China, Germany, France, Brazil, Russia and Japan.

It has also asked the advanced economies, including those with reserve currencies, to be "vigilant against excessive volatility and disorderly movements in exchange rates."

The declaration said these steps will help mitigate the risk of excessive volatility in capital flows that is faced by some emerging countries.


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