bses yamuna
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2 September 2005
UpdateSECTOR: UT ILITIES
©Motilal Oswal Securities Ltd., 81-82, Bajaj Bhawan, Nariman Point, Mumbai 400 021 Tel: +91 22 56575200 Fax: 2281 6161
Delhi Privatization: Success or Failure
Satyam Agarwal ([email protected]); Tel: +91 22 5657 5353 / Anjali Shah Vora ([email protected]) Tel: +91 22 5657 5305
BSE Sensex: 7,900 S&P CNX: 2,416
Delhi state government rolls back power tariff
hike
Following large-scale protests from consumers and political
leaders, the Delhi government has decided to roll back the
proposed average power tariff hike of 10% for domestic
consumers for FY06.
Financial health of distribution companies will notbe impacted
Media articles state that the proposal entails a revenue gap
of Rs1.84b. Of this, the Delhi government is expected to
provide Rs950m, while the balance Rs900m will be shared
by the three Delhi distribution companies – North Delhi
Power (NDPL), BSES Rajdhana Power (BRPL) and BSES
Yamuna Power (BYPL). The final details of the
arrangement are still being worked out.
We believe that the shortfall of Rs900m for the threedistribution companies will be met through the incremental
revenues generated through over-achievement of AT&C
loss targets. We note that a 1% reduction in loss level over
the targeted level will generate additional revenue of Rs900m
per annum.
Under the current mechanism, such revenues are being
shared equally by distribution companies (as efficiency
incentives) and consumers. Thus, a 2% reduction in AT&C
losses over targeted levels will entail that the gap of Rs900m
can be offset by the share due to consumers.
We believe that the current fiasco could also hasten the
process of making power theft a cognizable offence in
Delhi. The distribution companies have been demanding
this for quite some time. Some states in India, namely
Andhra Pradesh, Karnataka, Rajasthan, Uttar Pradesh and
West Bengal have already enacted an anti-theft law and
set up such special police stations and special courts. This,
in our opinion, will provide regulatory teeth to the distribution
companies and enable them to accelerate the process of reduction in AT&C losses.
Performance of distribution companies has been
encouraging
We believe that the performance of Delhi distribution
companies has been encouraging. By end FY07, we expect
the distribution companies to reduce AT&C losses to 20-
25%, which is a sharp improvement from FY02 levels of
50-55%.
Our calculations indicate that even at the current level of
AT&C losses, a 10% tariff hike will completely eliminate
the need for government subsidy in the Delhi power sector.
Also, the FY06 revenue gap of Rs3.2b would have been
significantly lower if the gains through accelerated
reduction in AT&C losses of Rs2b during FY05 were
accounted for. These gains are now being utilized to finance
the regulatory asset of Rs5.5b created for FY05, to meet
past under recoveries.
TARGETED AT& C LOSS LEVELS (%)
FY03 FY04 FY05 FY06 FY07
BRPL 47.6 46.0 42.3 36.3 30.7
BYPL 56.5 54.7 50.7 45.1 40.0
NDPL 47.5 45.4 40.9 35.4 31.1
Source: Delhi Electricity Regulatory Commission
AC TU AL PERFO RM AN CE (% )
FY03 FY04 FY05
BRPL 47.4 45.1 40.6
BYPL 56.5 54.3 50.1
NDPL 47.8 44.9 35.1
Source: Delhi Electricity Regulatory Commission
State government better off, despite incremental
budgetary support
As per media articles, the Delhi government will provide
budgetary support of Rs900m to the distribution companies,
post the decision to roll back the proposed tariff hike.
This would entail that for FY06, the total budgetary supportfrom the government will stand at Rs2.3b (Rs1.4b in the
All distribution companies
have outperformed the
targets
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Update
22 September 2005
form of transition support and Rs900m as revenue gap for
FY06), which is much lower than the transition support of
Rs13.6b, Rs12.6b and Rs6.9b provided for FY03, FY04
and FY05, respectively. Thus, we believe that the current
fiasco and consumer criticism does not put a question mark
on the privatization model being adopted by the Delhi state
government.
STATE GOVERN M ENT’S TRA N SITORY SU PPORT (RS M )
FY03 13,640
FY04 12,600
FY05 6,900FY06 1,380
FY07 0
Total 34,520
Source: Delhi Electricity Regulatory Commission
Has the tariff hikes by discoms been excessive?
As per the privatization model in FY03, distribution
companies were expected to become self-sufficient by
FY07 as a result of:
? Reduction in AT&C losses by 17%, and? Increase in power tariffs by 43.9%
Based on these assumptions, the state government had
accounted for a decline in transition support to Rs1.4b in
FY06 from Rs13.6b in FY03. We note that as against the
proposed cumulative increase of 39.8% till FY06, the actual
tariff hike has been 15.5% (not factoring in the recent 6.6%
hike which has been rolled back for domestic consumers).
TARIFF INCREASE (%)
FY03 FY04 FY05 FY06 FY07
Proposed * 10.0 10.0 10.0 5.0 3.0
Actual 0.0 5.0 10.0 - -
CUMU LATIVE TARIFF INCREASE (%)
FY03 FY04 FY05 FY06 FY07
Proposed * 10.0 21.0 33.1 39.8 43.9
Actual 0.0 5.0 15.5 15.5 -
* Proposed at the time of privatization
Source: Delhi Electricity Regulatory Commission
We foresee an accelerated pace of power sector
reforms in India
We believe that the progress on power sector reforms in
India till date is quite encouraging. ( Please refer to our
detailed 156 pages report: Utilities – Light at the end
of the tunnel, dated 27 May 2005). Very recently, the
Uttar Pradesh Electricity Regulatory Commission started
the groundwork for granting permission to set up parallel
networks in Meerut, Gaziabad and NOIDA. Also, the
Maharashtra Electricity Regulatory Commission has asked
the distribution companies to submit proposals for setting
up similar networks in urban circles.
We believe that given the state of the power sector in the
country and the provisions in the Electricity Act, SEBs have
no option but to shape up.
Maharashtra experience indicates tremendous
urgency towards reforms
The recent experience of Maharashtra indicates that the
country could soon face a serious power crisis if adequate
pr ivate sector in vestments are not channeled in to
generation. We believe lack of adequate investments in
generation and increasing electricity consumption
precipitated the Maharashtra crisis.
On a nationwide level, FY05 peak deficit stood at 11.7%.
Electricity consumption growth of ~5.5% p.a. over the last
few years has been largely met through improvement in
capacity utilization (industry PLF increased from 64% in
FY99 to 75% in FY05). Given that electricity consumptionin India continues to grow at ~6% p.a., average capacity
utilization cannot be increased beyond 80-82% and in view
of the fact that it takes three years to commission a new
pr oject, we sense a tremendous ur gency towards
accelerating the pace of reforms in the sector.
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32 September 2005
Attracting private sector investments in
generation remains the key challenge
We observe that CPSUs like NTPC and Neyveli Lignite,
are going ahead with the capex addition programme in
generation, driven by improved cash flows and payment
security mechanism. Private players have outlined a series
of projects, but they continue to remain on the drawing board
as the companies are waiting for mining allocations and
access to distribution. We believe that attracting private
sector investments remains one of the biggest challenges
for the government.
INCREASE IN GENERATION CAPACITY ON FIRMED UP CAPEX (FY05 -12)
optionality, which could be in multiples of the current size.
While CPSUs like NTPC and Neyveli Lignite have
embarked on a capex programme to double the existing
capacity by FY12, private players have also announced
large projects. For eg., Reliance Energy’s current
generation capacity stands at 942 MW, while announced
projects total 20,000 MW+ (Dadri 3,740 MW, Maharashtra
4,000 MW, Orissa 12,000 MW, etc). Tata Power has also
announced projects for 15,000 MW (coal based 11,000 MW,
Western region 1,000 MW, Eastern region 1,000 MW,
Maithon 1,000 MW and Delhi 1,000 MW).
Growth optionality is not equity dilutive
Most companies in the sector have large liquid investments
and cash in their portfolio. Therefore, a significant part of
the growth would not be equity dilutive. As at March ’05,
companies like NTPC, Tata Power and Neyveli Lignite
had around 50% of their capital employed in cash and
investments. For Reliance Energy, the percentage is 70%.
CASH AND INVESTMENTS (% OF CAPITAL EMPLOYED)
FY03 FY04 FY05 FY06 FY07
NTPC 43 46 48 46 43
Neyveli Lignite 11 43 50 55 56
Tata Power 36 41 49 50 55
Reliance Energy 32 56 70 74 76
CESC 2 2 6 10 10
Jaiprakash Hydro 1 1 10 16 22
PTC India 60 86 48 43 37
Source: Company/Motilal Oswal Securities Ltd
Source: Motilal Oswal Securities Ltd
Incumbents enjoy growth optionality
We believe that the Indian power sector is interestingly
poised, offering significant growth potential. Incumbents,
especially the private players and CPSUs, enjoy growth
6% 0% 0%0%15%
90%94%
443%
0%
100%
200%
300%
400%
500%
N
T P C
N e
y v e l i
L i g n i t e
T
a t a
P o
w e r
R e l i a n c e
E n e r g y
C
E S C
J a i p r a
k a s h
H y d
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J i n
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S t e e
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T o
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A
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CPSU’ s have firmed up capacity
addn plans; Private cos are
waiting for CBT / M erchant
Plant guidelines to be firmed up
and access to distribution
before committing generation
capex
Similarly to
JSPL, due to
the low base,
growth option
for private
players could be
in multiples of
current size
VALUATION COM PARATIVE
TARGET
RECO . CM P PRICE U PSIDE P/E (X ) ROE (% ) P/B V (X ) B V (RS/SH )
(RS) (RS) (% ) FY06 FY07 FY06 FY07 FY06 FY07 FY06 FY07
NTPC Buy 103 107 4.2 16.2 14.2 12.1 12.8 1.9 1.7 54 59
Neyveli Lignite Buy 85 88 3.1 14.3 13.2 12.6 12.5 1.7 1.6 49 54
Tata Power Buy 462 487 5.4 16.2 14.3 10.5 11.0 1.8 1.6 261 284
Reliance Energy Buy 574 734 27.9 18.7 17.8 9.7 8.8 1.7 1.6 329 354
CESC Neutral 239 219 -8.5 13.6 13.1 13.9 12.7 1.5 1.3 159 179
Jaiprakash Hydro Neutral 32 32 0.0 21.4 21.0 12.2 11.7 2.5 2.4 13 13
Jindal Steel and Power Buy 1,225 1,360 11.0 5.7 5.1 33.9 27.6 1.9 1.4 640 868
PTC India Buy 48 67 38.8 27.2 19.8 11.6 14.6 3.0 2.8 16 17
NTPC (Adj)* Buy 103 107 4.2 13.1 12.3 12.8 13.4 1.9 1.7 55 60
Neyveli Lignite (Adj)* Buy 85 88 3.1 11.0 10.8 14.7 13.6 1.6 1.5 53 58
* Adjusted for higher depreciation in books as compared to Tariff Order and Rebate on OTSS bonds
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42 September 2005
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