HSBC - India Power Utilities

HSBC in their report on India Utilities is very bullish on PTC

We see distinct opportunities in India’s deregulated power sector, with growth driven by consumer demand for a cheaper and more efficient power supply and industry players who will make higher margins than in the regulated market, especially those with first mover advantage.

In a country with a severe power shortage, we believe there is a bigger growth story here than the market is factoring in. Our analysis yields a 71% CAGR for deregulated power from FY07-12e and our estimates for companies discussed in this report are 0-40% above consensus. We believe government initiatives to increase competition –
including the ultra mega power policy – will increase deregulated power capacity from just 2.6GW (less than 2% of the country’s total) to 38GW (18%) by FY12e. While regulated plants’ ROE is currently 14%, deregulated plants should average 20-25%. We forecast that merchant power plants – those permitted to sell power to the spot
market – will be the most profitable segment, with expected ROEs of 25%.
PTC India should be a key beneficiary; we estimate net profit CAGR of 42% over FY06-11e and initiate coverage with an Overweight (V) rating and target price of INR99. Tata Power (Overweight), with 77% capacity in the deregulated segment
by FY12, should also gain significantly.


PTC India: market leader in trading Target price: INR99; rating: Overweight (V)
PTC India has a pipeline of 5GW of projects to be developed over the next five years, most of its capacity is in merchant power and it has innovative propositions like tolling (a virtual power plant agreement wherein the company will pay fixed charges to the plant developer, supply fuel and get power in return). We initiate coverage with Overweight (V) and a target price of INR99 (average of DCF fair value of INR114 and sumof- the-parts fair value of INR84/share). It trades at 15.5x FY08e and 12.7x FY09e earnings.

Our forecasts for trading volumes are higher than consensus, as we have factored in fee-based income from its non banking finance company (NBFC). Our EPS forecasts are 13% and 18% above consensus for FY08e and FY09e respectively.

Tata Power: right place, right time Target price: INR732; rating: Overweight Tata Power is likely to have more than 40% of its capacity in the deregulated segment by 2010,
compared to its current capacity of less than 20%.


NTPC
Target price: INR176; rating: Neutral
NTPC, the biggest player in the power sector, will also benefit from deregulation. However, we think valuations have run up recently and maintain our Neutral rating on the stock. If NTPC wins the Tilaiya or Krishanapatanam ultra mega power projects we think it stands to gain. It trades at 14.3x FY08e and 12.3x FY09e earnings.
We have factored in very high utilisation rates (88%) for coal plants, and so our EPS forecasts for FY08e and FY09e are 20% and 23% above consensus, respectively.

Reliance Energy
Target price: INR589; rating: Neutral
We think Reliance Energy is a cautious player and has taken a small step towards deregulation. If it wins the Tilaiya project, its earnings could grow above our forecasts. It trades at 12.2x FY08e and 10.7x FY09e earnings. Our forecasts for other income are higher than consensus because we factor in higher interest and foreign exchange income. Our EPS forecasts are 16% and 17% above consensus for FY08e and FY09e, respectively.