The Indian power scenario seems challenging for the year ahead with no solutions in sight for the major roadblocks, such as high cost of coal and non-availability of domestic coal and gas to feed power plants.

The government’s original 11th five-year plan target of around 75,000 mw has been revised thrice to around 51,000 mw largely on account of inability of power producers, both public and private, to execute projects during the slowdown that hit India along with the rest of the world during 2008-12.

Key challenges

Salil Garg, senior director, at Fitch Ratings told Financial Chronicle, “Dom­estic fuel availability will be low in 2012 compared with the rising demand from power projects due to environmental and land issues faced by the largest domestic coal supplier - Coal India. This should lead to increased reliance on imported coal for fuelling additional power capacity; however, the cost of imported coal and boiler design will play an important role in deciding the overall use of imported coal and, hence, the overall capacity that can be commissioned.”

Market experts believe the fourth quarter would essentially be weak for companies who rely on spot coal and have no domestic linkages as the merchant price of coal along with the high cost of Indonesian and Australian coal is expected to be high during the election season in states such as Uttar Pradesh, Punjab, Uttrakhand and Goa.

Abhinav Bhandari, senior analyst with Elara Securities, says, “The overall environment for the power sector will continue to remain bleak over the next few quarters because there is no clarity on the policy front with regards to availability of coal. With international coal prices re­m­aining high, domestic power firms, es­p­ecially with no captive mines, will find it difficult to stay profitable. Most po­wer firms are expected to report weak ea­rnings in the last quarter as higher input costs and low tariffs will hurt margins and impact bottom lines.”

However, Bhandari adds, merchant power tariffs are likely to rise sharply on strong demand in the states going for elections that can boost earnings of companies involved in the merchant power business.

JSW Energy has already turned out to be the first casualty among the power-generating companies that reported a loss during the quarter. The company on Sat­urday reported a loss of Rs 82 crore during the quarter compared with a profit of Rs 152 crore in the same quarter last year.

The company believes that economic growth is expected to moderate as the steps initiated to contain inflation have started to have a bearing on the overall economic activity and growth. JSW Energy said, “With the euro zone involved in tackling the economic crisis in their region and slow recovery witnessed in the US, the forecast of global economic growth for 2012 continues to look weak.”

Rabindranath Nayak, analyst with SBI Capital Markets, says, “There would be some pressure in the power sector because of coal-linkage and pricing issu­es. Besides, the government is taking its own sweet time making investors jittery about the sector going ahead.” However, there is consensus that the government is inclined to comprehend issues encountered by the sector and work towards resolving the issues to enable the sector to sustain, develop and grow.

Garg of Fitch Ratings says, power sector reforms, required to restore the financial viability of state power utilities, would gain traction during 2012. The sector will also remain exposed to both fuel availability and price risks during 2012. Launch of new generation projects will slowdown in 2012 because of lower investor interest over fuel availability, softening of mercha­nt power prices, higher fuel costs, higher interest rates and slow progress on refo­rms at the distribution level, Garg added.

Power sector-specific financial institutions, such as Power Finance Corporation (PFC) and Rural Electrification Corpor­ation (NEC), will meet the greater part of the sector’s debt requirements.

Nearly 100 per cent historical recovery rates lend stability to the credit profiles of REC and PFC despite their high sector concentration risk. “Deterioration in financial profiles of SPUs leading to slippages in recovery rates of REC and PFC could affect them negatively,” Garg added.

Negative outlook

Most stocks are expected to perform negatively during the fourth quarter and experts are advising investors to stay cautious towards the sector in the short to medium term. “Investors will continue to stay cautious while investing in power stocks as falling revenues and worries about further delay in coal solution could dampen sentiment. But, since the power sector has one of the stronger growth prospects in the long run, given the rising demand, investors can look at it as a good long-term bet,” Nayak of SBI Caps said.

Some of the other leading power-producing companies that are yet to announce their third quarter results are Adani Power, Tata Power, Lanco Infra-tech, GMR Infrastructure and NTPC.

Stock performance

The BSE power index has fallen 1.45 per cent over the past three months compared with BSE Sensex, which inched down 0.28 per cent during the same period.

SJVN shares declined 13.96 per cent followed by NHPC, Torrent Power and Lanco Infratech, shares of which dec-lined 11.90 per cent, 5.12 per cent and 0.61 per cent, respectively. Tata Power, Adani Power and NTPC rose 7.86 per cent, 4.72 per cent and 3.01 per cent, respectively.

“Headwinds in the power sector are expected to further intensify, increasing the earnings and cash flow risk for IPPs (independent power producers). This may lead to forced dilution in asse-ts/equities, resulting in a consolidation phase that will benefit companies with strong balance sheets (JSPL, Tata Power). However, in such a challenging environment, we continue to prefer regulated earnings models (PWGR, NHPC, and NTPC) having a low earnings risk,” said Brokerage IIFL in a recent note.

Brokerage Sharekhan in a note said that coal supply constraint till October led to low power generation and higher deficit. “Even India’s leading power generator NTPC experienced a 6 per cent year-on-year (y-o-y) drop in power generation during October last year. During this period, power generation/supply was affected across the country, which was reflected in higher merchant power prices. However, coal supply issues got solved during November and December,” the report said.

Therefore, experts said that reforms initiative from the Union government towards addressing key issues such as fuel shortage and policy on unviable imported coal-based projects, among others will be key for the sector’s performance.

(With inputs from Amit Mudgill)

vikassrivastav@mydigitalfc.com