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Feature | January 2015

Fundamentally strong!

Strong fundamentals, strong order book as well as execution record, and of course, a strong pipeline of new projects has made public sector enterprises the most powerful companies amongst peers. With some contributing more than 30 per cent in terms of generation, some financing close to 25 per cent of power finance and a few with orders worth more than Rs 60,000 crore on the anvil, the PSUs in the power sector are by virtue the most sought-after companies to look up to.

The power sector has begun to witness several initiatives by authorities to address concerns on State Electricity Boards, fuel supply pacts and power purchase agreements. It would, however, take a while before clarity on several issues emerges. In this environment, analysts continue to prefer Public Sector Utilities which are relatively better positioned on these fronts, and have the fundamentals to support them. That said, the feature - Powerful PSUs - has not only considered the financial performance of companies featured (NTPC, NHPC, PGCIL, Coal India Ltd, BHEL, PFC and ONGC) but has also mentioned the future opportunities that they have lined up. That includes capacity addition and expansion plans, capacity expenditure plans, their latest offerings in terms of technology and trends in the sector. Meanwhile, the feature also highlights the future plans of companies mentioned in the feature through management interviews.

So, what makes them so powerful in India that even analysts rely on these companies as compared to their private peers? Let´s have a look.

NTPC (Generation)
With market cap of over Rs one lakh crore, State-run NTPC is well placed on top as compared to its peers, importantly in the private sector, such as Tata Power with market cap of Rs 22,000 crore, followed by Reliance Power (Rs 17,500 crore), JSW Energy (Rs 17,000 crore) and Adani Power (Rs 12,320 crore) making it one of the powerful PSUs within the power sector. It´s not only market cap that has made the company stronger but its net profit (Rs 11,000 crore) too has overshadowed the performance of private players. Meanwhile, NTPC reported a marginal decline across generation of 0.6 per cent y-o-y due to 0.5 per cent y-o-y decline across coal-based plants due to poor supply of coal from Coal India (CIL) and lower demand. But the same has impacted other power generation companies too. For example, generation across Tata Power´s plants declined 4.5 per cent y-o-y as generation was impacted due to a technical snag at its Trombay plant, which impacted generation at one of its units for a day. Meanwhile, growth across Reliance Infra (up 104.3 per cent) and Jaiprakash Power (up 35.2 per cent) reflects incremental capacity added over the past year. The generation-based company´s portfolio is just not limited to only thermal generation but has now expanded to the sunshine sector too. (Turn to page 42 for NTPC´s profile)

Analyst take on NTPC: At the standalone level, there was no major capacity addition by NTPC. This makes the company´s installed capacity stand at 36,467 MW. Meanwhile, at the group level, the capacity stands at 43,128 MW. However, Nalin Bhatt, Sr Analyst, Motilal Oswal, is optimistic as the NTPC management guided its capacity addition target to 1,800 MW by FY15 as well as is confident of attaining financial closure on all projects by year end.

But it´s just not NTPC that is contributing significantly to the nation. As NTPC just takes care of the generation business, others such as Power Finance Corporation (Finance), ONGC (Oil & Gas), NHPC (Hydropower), PGCIL (Grid), BHEL (Equipment) and CIL (Coal) are also equally contri-¡buting to the nation´s growth.

NHPC (Generation-Hydro)
Since NHPC´s business focus is mainly on hydropower generation, the company´s outstanding market cap of Rs 22,600 crore says it all. Why? This is mainly because not a single private player was near what NHPC has achieved in the last couple of years in terms of generation, revenue and of course, new project offerings. NHPC presently has an installation base of 5,702 MW from 17 hydropower stations on ownership basis including projects taken up in joint venture. Considering the impediments faced during execution of these projects such as unfavourable geological conditions, difficult law & order problems and inaccessible and remote locations, the achievement so far is commendable. The generation performance of these stations has been outstanding. NHPC is presently engaged in the construction of seven projects aggregating to a total installed capacity of 4,095 MW. In addition, NHPC is awaiting the clearances of nearly 8,810 MW of projects which are in J&K, Manipur, Arunachal Pradesh, Sikkim and Uttarakhand. Meanwhile, there are around 3,810 MW of projects under construction of which a 2,000 MW hydro-project is in Arunachal Pradesh. Added to the above capacity addition, NHPC with its JV partners is developing a project with a capacity of 5,206 MW. Given the renewed thrust on development of hydropower in the country, NHPC has drawn up a massive plan to add over 10,000 MW of hydropower capacity by the end of the year 2022. (Turn to page 43 for NHPC´s profile)

Analyst take on NHPC: India´s robust hydropower potential of 148.7 GW has been impacted by various issues related to environmental clearances, long construction period, project cost overrun, etc., leading to capacity addition of only 40.2 GW till date. With an installed capacity of 6.5 GW (including 1.5 GW through JV), NHPC contributes 16 per cent of India´s total hydro capacity and 14 per cent of total hydro generation (18.5 BUs in FY14). However, NHPC´s historical growth has been hit by sectoral woes leading to delayed project execution and cost overruns. However, feels Chirag Shah, Analyst from ICICI Direct,´With the formation of a stable NDA government at the Centre, we believe project clearances and execution will take off at a rapid pace, which will address the sectoral concern.´

PGCIL (Grid)
Power Grid has the experience of constructing 765kV UHVAC and +-500kV HVDC transmission systems. The company is now working on next higher transmission voltages of +-800kV HVDC and 1,200kV UHVAC system to achieve efficient utilisation of RoW and increased power transfer capability for transfer of bulk power over long distances. The company is currently establishing two +-800kV, 6,000 MW HVDC bi-pole lines: one from the North-eastern region to the northern region and the other from the western region to the northern region. The 1,200 kV (The world´s highest voltage) UHVAC technology is being developed by the company with participation from indigenous manufacturers of equipment, and towards this direction, the 1,200 kV test lines are charged at the 1,200 kV National Test Station at Bina, Madhya Pradesh, and field tests are under progress. Now, being the nodal agency for grant of Long Term Access (LTA) to power producers, Power Grid has undertaken development of high capacity transmission corridors for evacuation of a large quantum of power from various Independent Power Producers (IPPs) mainly coming up in resource rich States like Odisha, Jharkhand, Sikkim, Madhya Pradesh, Chattisgarh, Tamil Nadu, Andhra Pradesh, etc. This power is required to be transmitted to load centres located across the States and regions.

Accordingly, implementation of 11 high capacity power transmission corridors (HCPTCs) has been planned by the company in consultation with CEA, IPPs and beneficiaries. CERC has already granted regulatory approval for 11 HCPTCs at an estimated cost of Rs 75,000 crore. The market cap of PGCIL stands next to NTPC. At present, the market cap of PGCIL is Rs 72,000 crore. (Turn to page 44 for PGCIL´s profile) Analyst take on PGCIL: Analysts from Motilal Oswal are of the opinion that although the capitalisation was robust at Rs 4,700 crore (up by 130 per cent) and capex was Rs 4,860 crore (down by 16 per cent) they are expecting the capitalisation to likely see an upward trend to Rs 24,000 crore and a capex of worth Rs 22,500 crore in FY15.

Coal India Ltd (Coal)
The only focused miner in the country and always accused of monopoly by private miners as well as power producers, count government backed generation companies too-Coal India Ltd is the name that cannot be missed. Importantly, the company has the distinction of holding the largest coal reserves in the world and is also the largest producer of coal. CIL produces more than 80 per cent of the domestic coal and enjoys a virtual monopoly in India. Meanwhile, almost 75 per cent of the CIL dispatches are to the thermal power sector in India. The relatively low per capita power consumption in India compared to world average and the continuing power deficit in India presents significant potential for growth in the demand for power in India, and thus demand for non-coking coal. In addition, average realisations (including e-auction) for CIL in the last couple of years have remained stable at Rs 1,900 per tonne; this is despite 50 per cent fall in global coal prices. Also for land-locked power plants it is not feasible to import coal due to transportation cost and hence the power generation players will always have to rely on CIL. These two factors give confidence that realisation for CIL will gradually increase going forward.

Imports increased to 138 mt in FY13 from 73 mt in FY10 which is expected to increase to 186 mt by FY17 as domestic production is not able to keep pace with demand. CIL is looking to increase its output gradually by increasingly using newer technologies which will help in exploring resources in a more efficient manner. It is also looking to expand the existing mines and develop new mines to enhance production. CIL is also looking to use new technologies to explore mines which were abandoned earlier because of unfeasible operations. It is also adopting superior technologies to increase production in underground mines. (Turn to page 45 for CIL´s profile)

Analyst take on CIL: Analysts from Arihant Capital are upbeat on CIL as it has set a target to double its present production to 1,000 mt by 2019. This is also coupled with the company´s plans to foray into electricity generation by ratifying its first 1,600 MW pithead thermal power project in Odisha.

BHEL (Equipment and EPC)
BHEL being almost a monopoly till 2009 in the Indian BTG industry, providing higher degree of indigenisation with BTG technology, remained on top till the 11th Plan. Meanwhile with the emergence of Chinese, Korean players and also from domestic players like L&T, Bharat Forge-Alstom, JSW-Toshiba and BGR-Hitachi, BHEL has managed to sail through the fierce competition and is now a preferred EPC and power equipment player in the country. Consider this: as per management commentary BHEL´s EPC segment orders stand at 15,000-17,000 MW plus 2x4,000 MW UMPP. It is expected that out of these, BHEL is likely to achieve 8,000 MW orders, given these orders are awarded in FY15. It is expected that the order inflow for FY15E and FY16E is likely to be Rs 30,824 crore and Rs 46,042 crore, respectively. Most of the ordering expected in FY15E will be from Central and State utilities. The participation of the private sector will be highly influenced by the steps taken by the government to resolve the concerns plaguing the power sector.

Analysts expect the share of industry segment revenues (sector comprises transportation, renewable, captive power plants, defence and power transmission) to have all ingredients to inch up its share in overall, in the long term, from the current average of 18-20 per cent. The initiatives taken by BHEL in the form of setting up of JVs/MoU for setting up a 4,000 MW ultra mega solar power project and setting up capacity for manufacture of locomotives and EMUs are steps in the right direction. Also, renewed focus of the new government on the renewable, water, defence and railways space will act as strong point for BHEL. (Turn to page 46 for BHEL´s profile)

Analyst take on BHEL: According to analysts, BHEL with the largest capacity of 20,000 MW of BTG manufacturing will stand to benefit the most as the company (which has always commanded >50 per cent market share in the BTG industry) will be in a sweet spot to win orders. Even in FY15, wherein BTG ordering is likely to be sedate, BHEL is expected to bag 8,000 MW of BTG/EPC orders.

Power Finance Corporation (Finance)
PFC, with a market share of 25 per cent in power financing, is bound to reflect the changing business mix. The company has delivered a healthy profitability over the past several quarters led by a strong loan book and high net interest margin. However, the recent guidelines of the RBI allowing regulatory forbearance for banks on infrastructure financing could increase the competitiveness in the sector going ahead which may affect the company´s growth and margins. According to the management loan assets have shown a robust growth of 16 per cent to almost Rs 200,000 crore (approximately) from Rs 172,000 crore (approximately). In addition, unlike other State-run banks, which have been marred by maximum NPA level of Rs 2.52 trillion (cumulative) as on June, PFC has not added any new NPAs this quarter. Its gross NPAs stand at Rs 1,977 crore which stands at 0.99 per cent of the loan assets and the net NPAs stand at Rs 1,543 crore which is 0.77 per cent of the loan assets. The company has already achieved 60 per cent of its target in the first half of FY15 against the target of Rs 55,000 crore. Correspondingly, during H1 FY14, PFC had disbursed Rs 18,012 crore which was also 38 per cent of the target during that year. (Turn to page 47 for PFC´s profile)

Analyst take on PFC: The government is firm about taking necessary steps to remove the bottlenecks in the sector. Analysts from ICICI Securities feel that any development on these fronts will improve the sentiment and lead to a revival in the power sector, which, in turn, will benefit infrastructure finance companies (IFCs) like PFC. At the end, with these companies planning to add capacity of more than 20,000 MW in the next couple of years, giving the much required push to the power sector, the sector is all set to roll in the next two years. So vendors, what are you waiting for? Go and grab the opportunities.

Rahul Kamat

Disclaimer: Views expressed by analysts are in their individual capacity. Readers are requested to do their own due diligence before making any investments in the above companies.

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