Merchant power tariffs witness a short-term hike

Rise may be short-lived, but prices may stay high till June this year. Companies like JSW Energy, Jindal Steel & Power and Adani Power are likely to benefit

After six months of sluggish performance, merchant power tariffs are on a rise again. From a low of around Rs2 per unit in December 2009, merchant power rates have reached a decent level of around Rs7 to Rs8 per unit in April 2010. Analysts say that this short-term rise in merchant power tariffs would be beneficial for JSW Energy, Jindal Steel & Power Ltd (JSPL) and also Adani Power Ltd to some extent.

As per Indian Energy Exchange data, merchant power rates touched a high of Rs8.50 per unit on Tuesday. As on 1 April 2010, power tariffs had touched a high of Rs5 per unit, moving towards Rs8 per unit on Wednesday.

Moneylife had earlier reported in December 2009 on how merchant power tariffs had crashed to unbelievable levels of Rs2 to Rs5 in December 2009. Power tariffs had fallen from a high of Rs12 to Rs14 per unit in June 2009. However, tariffs have been on a downturn since September. They were quoted in the range of Rs6 to Rs8 by the end of September and the beginning of October 2009. In November, they fell to Rs2 to Rs4 per unit, with power traded during non-peak hours falling to below Rs2 in mid-December 2009.

Merchant power tariffs as on 1 January 2010 were at a high of Rs3 per unit, moving towards Rs5 per unit in February and March 2010. With the onset of summer, analysts expect the rise in merchant power prices to continue upto June 2010, and they are expected to again fall thereafter.

During the course of this short-term rise in merchant power tariffs, JSPL and JSW Energy are likely to benefit most from the rise. Analysts point out that Adani Power Ltd may also profit to a certain extent. JSW Power and JSPL have sufficient on-stream merchant power capacities to trade during this peak season.

“The companies that will benefit from the immediate increase in high power tariffs are JSPL and JSW Energy as they have capacities on the ground. If we look at a year-end average, the power tariffs would stabilise at around Rs4 to Rs5 per unit for the next couple of years. However, it can also surprise us on the upside. If this happens, it would be beneficial to all companies in the power sector,” said a research analyst who has requested anonymity.

“The power tariffs will remain high till June 2010. In the long term, they will be in the band of a low of Rs3 per unit to a high of Rs6 per unit,” added another analyst who also requested anonymity.

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    Finance ministry may seek Cabinet nod for Coal India divestment

    The ministry of finance may seek the Union Cabinet’s approval for the proposed 10% stake sale in State-owned Coal India Ltd (CIL) by the end of this month, a senior coal ministry official said here today, reports PTI.

    “The proposal is with the department of disinvestment under the finance ministry. They will place it before the Cabinet for approval maybe by the end of this month,” additional coal secretary Alok Perti told reporters on the sidelines of the ‘India Energy Congress 2010’.

    The government expects to mop up Rs12,000 crore from disinvestment in the country’s largest coal producer, which would be part of its efforts to raise about Rs40,000 crore through stake sale in 2010-11.

    The government at present holds 100% equity in CIL and is likely to sell 63.13 crore shares in the IPO.

    “The IPO is targeted in August,” Mr Perti added. Out of the proposed 10% stake sale, 9% of the government's equity could be channelized towards the IPO and rest is proposed to be given to its nearly 4 lakh employees.

    On the appointment of a regulator for the coal sector to oversee mining activities, proposed auctioning of blocks and coal pricing, Mr Perti said that the government is seeking views from different ministries on the subject and could seek Cabinet nod for the appointment next month.

    “We have circulated cabinet notes (for a coal regulator) to different ministries—particularly the law ministry. It could be taken up by the Cabinet by the middle of May,” he said.

    Coal minister Sriprakash Jaiswal had said in February that the sector would get a regulator by mid-March, after the government introduced the subject in Parliament during the Union Budget 2010.

    Mr Perti further said that India may move to a mechanism of linking coal prices to its gross calorific value from the present system of pricing the fuel based on its ash content. The more the ash content the less would be the price and vice-versa.

    “We are evaluating such a move. No timeframe could be given at present,” he said.

    Gross Calorific Value system would link the prices to the amount of heat generated by burning a kilo of coal and not on the ash content, which is a global practice. Asked if the proposed international mechanism could lead to an increase in coal prices, Mr Perti said, “No, it will not lead to an increase in prices. But, of course, the gap in prices between the highest grade and the lowest grade would be reduced.”

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    Two (wheelers) to tango over the next few years

    Allaying the fears of higher input costs, two-wheeler manufacturers in India are aiming for higher targets. Can they keep up the growth momentum?

    Two-wheeler makers in India are likely to show a huge growth of more than 25% in sales volume in FY10 after two years of muted growth. With this robust performance, many automakers are aiming to achieve a growth of above 30% during FY11. Bajaj Auto Ltd, the country's second-largest two-wheeler maker, aims to sell 4 million units in FY11, up from 2.5 million units it sold during FY10.

    While analysts believe that the Indian two-wheeler industry can grow at a compounded annual growth rate (CAGR) of 12% to 15%, the target set by Bajaj (around 60% year-on-year, including exports) looks like a bit on the higher side.

    “The road ahead in FY11 is likely to be bumpy on account of a high base of FY10, as automobile manufacturers will have to deliver substantial volumes to show growth on this high base. The volumes are also likely to be tapered down by up-tick in interest rate cycle, price increase due to rise in raw material cost and mandatory up-gradation of vehicles to meet Euro IV emission norms. Thus, we believe that FY11 is going to be a testing time for auto companies to maintain the strong volume growth momentum," said Sharekhan Ltd in a research report.

    Last month, some auto financiers, such as ICICI Bank Ltd, HDFC Ltd and Kotak Mahindra Bank raised interest rates by 25 basis points (bps) to 50 bps (100bps=1%). Similarly Ceat Ltd and Birla Tyres Ltd increased tyre prices while other tyre producers are seeking to increase prices by 3% to 5% due to hike in natural rubber prices and growing demand. Amidst all these concerns, the auto sector has reported strong sales volumes in March 2010 due to the strong demand across urban, rural and industrial segments.

    While the strong demand from the rural segment drives the figures for Hero Honda Motors Ltd, the country's largest two-wheeler maker, it’s the urban demand for premium bikes that pushes up the numbers for Bajaj Auto. Both the players, which together hold about 79% share in the domestic market, are gearing up to meet this growing demand by ramping up their respective capacities.

    "Rural market growth is expected to remain stable with higher income visibility and disposable income through non-farm sources and low two-wheeler penetration levels. Despite margin contraction from current levels, we expect industry profitability to remain above historical levels. Higher competitive intensity is unlikely to trigger a price war, as we expect the top two players to continue to remain dominant with a combined domestic motorcycle market share of 78% in FY12 (estimated) from 79% in FY10 (estimated)," said Ambit Capital Pvt Ltd in a report.

    India's market is divided roughly into two categories, urban and rural, depending on the needs and resources of consumers in these areas. For example, pricing and fuel efficiency matters most for rural consumers whereas the urban consumer would prefer more power and style in a motorcycle. Rural demand has assumed significant importance with contribution to total motorcycle sales increasing to 36% in 2008 from 21% in 1984.

    According a report by Enam Securities Pvt Ltd, under the Rs50,000 price tag category, Hero Honda is the undisputed two-wheeler king in India. In the entry level segment of Rs40,000 and below category, Hero Honda's market share is 43% while Bajaj Auto and TVS Motor Co Ltd's share is 30% and 25%, respectively. However, in the executive or Rs40,000-Rs50,000 price category, Hero Honda rules supreme. Its market share is a whopping 74%, while Bajaj Auto and (surprisingly) Honda Motors and Scooters Ltd (HMSI) stand a distant second and third place with a market share of 16% and 7%, respectively. TVS Motor, the country's third largest two-wheeler maker, stands far away at fourth place with a mere 1% market share in this category.

    After launching two new products in the premium band of motorcycles, Bajaj Auto has once again switched its focus to the highly lucrative entry-level motorcycle market with the new ‘Platina 125’ motorcycle. The price-tag of Rs36,000 makes the new ‘Platina’ the cheapest motorcycle in the country with an electric start as a standard fitment.   

    Going ahead during FY11, demand would be driven by recovery in urban areas, while in the rural market, the secular demand would continue. "Demand from urban areas, which constitutes about 40%-50% of the total market, is likely to grow in FY11 as consumer sentiment improves. We expect demand for higher-end motorcycles to benefit as a result. While rural demand will also grow, pace of growth is expected to be lower on account of withdrawal of stimulus packages like the Sixth Pay Commission, increase in minimum sales price (MSP) and high base effect of FY10," said Enam. The brokerage expects two-wheeler sales to touch 15 million units by FY15.

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