CERC caps power exchange tariff rates at Rs11 per unit

CERC has, through a draft order, annouced that power tariff for all day-ahead transactions is capped at Rs11 per unit (kWh). This cap is applicable to all merchant power transactions whether through the power exchanges or on a bi-lateral basis. The CERC has also stated that this order is valid for the next 45 days, during which time (on 8th Sept, 2009) it would hold a public hearing. The commission would review it's decision after these 45 days. As of now, the power exchanges trade only in the day-ahead segment, all transactions for longer durations are on a bi-lateral basis. We do not rule out CERC capping these rates in the near future. Since the beginning of the current water year (June 2009 to May 2010) the power tariff on the IEX has been higher than Rs11 / kWh on 20 days, with the max price reaching Rs17 / kWh on 13th Aug., 2009. Similarly, in the current water year there have been 9 days when the average price has been higher than Rs11 / kWh. Today the power day-ahead rates on the IEX was Rs3 / kWh to Rs12 / kWh. As mentioned in our earlier reports (see below) this would be negative for players with large merchant / captive capacities. Further, we do not expect this to have any impact on power traders such as PTC as their margins are capped at 4 p/kWh, irrespective of the purchase / sale price of power. We expect this to be negative for GMR Infra which sells merchant power from its Tanvir Bawi power plant. The other stocks which could be negatively impacted are JPSL, JSW Steel, Nava Bharat, etc. Links: (1) Draft Order, (2) Public Notice

Bulk Tendering for Super-Critical Units of NTPC & DVC approved by CCI

The CCI earlier today approved the bulk tender route for ordering of 11 super-critical units of 660MW (total of 7,260MW for five projects) at an estimated cost of Rs400 bn. These units would be used by NTPC and Damodar Valley Corporation (DVC) for its various projects (see table 1 below for details). All these projects are scheduled to be commissioned in the 12th five year plan (12FYP). Table 1: Projects benefiting from bulk tendering Organisation Project # Units Project Size (MW) NTPC & Bihar JV Nabinagar 3 1,980 NTPC & UP JV Meja 2 1,320 NTPC Mouda Extn 2 1,320 NTPC Solapur 2 1,320 DVC Koderma II 2 1.320 TOTAL 11 7,260 Thus, of the 11 units, 4 units would be used for NTPC's projects, 5 units for projects in which NTPC has 50% stake each, and the balance 2 units for DVC projects. Key terms and conditions of the contract include phased indigenous manufacturing of the super-critical equipments in India award of contract through the international competitive bid (ICB) route separate bids to be invited for boilers and steam-turbine generators The main advantage of this bulk tender would be in terms of the increased pace of indigenisation of super-critical technology. This assumes significance in light of the ~100GW capacity addition proposed during the 12FYP. The original proposal was for ~92GW, which is now increased on account of the expected delays in the 11FYP capacity addition programme. A majority of the 12FYP capacity addition is expected to happen using super-critical technology. The CCI has also indentified key players who are expected to bid for this contract. These are as below: Boiler Package Steam Turbine-Generator Package BHEL-Alstom BHEL-Siemens L&T-Mitshubishi L&T-Mitshubishi GB Engg-Ansaldo Bharat Forge-Alstom Toshiba-JSW The original proposal had stated that of the 11 units, at least 6 units would be awarded to BHEL if it the L1 bidder, else 5 units would be awarded to BHEL if it matches the L1 bid. However, today's press release by the CCI is silent on this issue. This press release is also silent on the maximum number of units a player can bid for, whereas the original proposal had a restriction of a maximum of 3 projects (not units). This is intended to ensure increased participation as well as bring in more technology into the country. Following the approval of Government of India, NTPC is required to go for Notice Inviting Tender (NIT) of bulk tendering of these 11 units within 45 days.

Reducing rainfall deficiency, better hydro generation

We released a short thematic report on the impact of rainfall on hydro power generation and merchant power rates. The key highlights are: Hydro power generation continues to be lower (-14% in July 2009 and -11% YTD FY10) than that in the previous fiscal. Hydro power generation, though lower than in the last fiscal, was maintained on account of drawal from the reservoirs. This had resulted in the reservoir levels depletion to precariously low levels of 9.9% of the full potential. However, rainfall deficiency, as measured by the deviation from the normal rainfall, has reduced by the end of July 2009. However, the distribution continues to be uneven, with the north and north-east regions facing more deficiency than the western and southern regions. We believe that if the rainfall quantum and pattern stays on tracks as at present hydro power generation could improve. We note that the short term merchant power tariffs quoted on the power exchanges are not a benchmark. This is so because of (a) the power traded on these exchanges is on a day-ahead basis, i.e. based on power to be delivered the next day. We do not yet have longer duration power trading contracts on these exchanges, and (b) the total volumes on both the operational power exchanges constitutes only 0.7% of the total power generation in India. COMPANIES IMPACTED: Based on our analysis, we expect NHPC to be able to increase generation, particularly from its hydro-power plants in the north-eastern region. During Apr-Jun 2009, NHPC's generation was 2.4% higher than that in Apr-Jun 2008, and 5.5% above the targets for the same period. Jaiprakash Hydro (JP Hydro), whose entire hydro capacities are in the northern region, was the worst affected with its hydro generation for Apr-Jun 2009 dropping 10.3% YoY to 946MUs. Tata Power's all three hydro-power stations are in the western region and have largely not been impacted. Tata Power's hydro-power stations generated 369MUs in the period Apr-Jul 2009, up 10.3% from the corresponding previous period. While utilities such as Tata Power & Torrent Power would benefit to the limited extent of merchant capacity, utilities such as GMR Infrastructure, Adani Power etc. which have larger merchant power capacities would benefit in the short term from higher merchant / spot prices. In addition, players in the metals sector such as JSPL, JSW, Nava Bharat Ventures etc., with large captive power plants, would also benefit. Power trading firms such as PTC would benefit only due to increased volumes, as their margin on inter-state power trading is capped by regulation. All the other major players in hydro-power generation are either unlisted or have projects which are still in the development/construction phase (GMR Infrastructure, GVK Power & Infrastructure, Lanco Infratech, NTPC etc.).

Key Highlights of the June 2009 IIP data & the emerging trend

Key Highlights from the June 2009 IIP data and the emerging trend Note: All data is YoY increase, unless specified IIP has consistently increased from the past six months from 1.0% in Jan 2009 to 7.8% in June 2009 IIP has jumped from 2.2% in May 2009 to 7.8% in June 2009 vs 5.4% in June 2008 However, on a fiscal YTD basis FY10-YTD IIP is up 3.7% vs FY09-YTD growth of 5.3%, and is higher than the 2.7% for FY09 Significantly, the growth in the capital goods, manufacturing and mining indicies stands out Capital Goods: After three months of negative growth, the capital goods IIP index grew 11.8% in June 2009 (vs 7.8% in June 2008), however on a YTD basis it is up only 1.0% in FY10 vs 7.9% in FY09 Manufacturing: If the manufacturing IIP index is an true indicator of business activity, June 2009 is the best since March 2008; yet on FY10-YTD growth was at 3.3% vs FY09-YTD growth of 5.8%. The key sectors within the manufacturing space which were significantly up are: basic chemicals & chemical products which has the maximum weightage within the manufacturing sector grew 5%, the machinery (other than transportation equipment) which is the second biggest contributor within the manufacturing sector was up 12%, & basic metal & metal products was up a healthy 10%. Food products (production), with the fourth highest weight in the manufacturing sector, witnessed a degrowth for the third month in a row in the backdrop of the weak monsoon, this obviously has implications for food prices / primary inflation Mining & Quarrying: The mining IIP index is up a huge 15.4% in June 2009 vs just 0.1% in June 2008, clearly indicating a low base effect play, and a similar trend follows the YTD data, with the index up 7.3% in FY10-YTD as against 4.0% in FY09-YTD In summary, for June 2009 growth is observed across all sectors when compared to the past six months as well as the previous year. However, on a YTD basis none of the sectors (exceptions: intermediate goods, mining and electricity) have been better in FY10 than in FY09. Note: The final IIP data for FY09 was also released along with today's data for June 2009. Hence, the data for FY09 is now final, & this indicates a growth of 2.7% in the General Index, down from 8.5% in FY08 & 11.5% in FY07. With inputs from ASV Krishnan

Merchant Power Prices double in past week

Merchant / Spot Rate on the Power Exchanges Note: Spot rate on the power exchanges refers to the rates for power to be supplied the next day (day-ahead rates) The spot prices of electricity had been trending downwards since the beginning of May, which was also the peak summer season when one would have expected the spot rates to rule higher. From Rs15.00 per unit at the high point on 1st May,2009; by the end of May, 2009 the scenario was such that there were no buyers (implying a zero rate) for a period during the day. However, the past three weeks since 26th July, 2009 the rates for short-term power has shot up from Rs2.68 per unit to Rs12.83 per unit on 11th August, 2009 (yesterday). More significantly in the past week alone the electricity rates have increased from Rs6.36 per unit. Spot prices since Jan 2009 Spot prices since May 2009 Given the operating mechanism of the power exchanges in India today, all the trades are based on actual delivery and on a day-ahead basis (i.e. for power to be supplied the next day), and hence it is difficult to precisely forecast what can it expected in the next fortnight or month. We believe that concerns stemming from lower than normal rainfall, with a possibility of drought in substantial parts of the country, is driving short-term power rates higher. We also believe that if the rainfall situation does not improve, power shortages would increase over the next two months, resulting in even higher power prices. While utilities such as Tata Power & Torrent Power would benefit to the limited extent of merchant capacity, utilities such as GMR Infrastructure, Adani Power, etc which have larger merchant power capacities would benefit in the short term from higher merchant / spot prices. In addition, players in the metals sector with large captive power plants such as JSPL, JSW, Nava Bharat Ventures, etc would also benefit. Power trading firms such as PTC would benefit only due to increased volumes, as their margin on inter-state power trading is capped by regulation. However, it should be noted that the power is not storable & that the total volume of power traded is still very low in India. Thus, though these rates are not a benchmark, they do offer some indication. Note: All analysis based on data from IEX, one of the two operational power exchanges in India.

GMR Infra's Holding Company plans LSE Listing

GMR Infrastructure GMR Infrastructure's holding company plans to list itself on the London Stock Exchange. We believe that this would be positive for the stock as it would ease funding pressure for the group. GMR Infrastructure is slated to deploy a total of about Rs227 bn over the next three years, of which about Rs45 bn would be GMR Infra's equity contribution in various SPV's, & an additional Rs182 bn would be raised as debt funding for these projects. This does not include the USD1 bn bridge loan availed to acquire a 50% stake in Intergen and is due for repayment in May 2010. [Business Standard]

Port Volumes in July 2009

July 2009 Port Volumes: Volumes at the major ports are down 1% YoY for July 2009, but cumulatively for YTD-FY10 are up 1% YoY. We believe that this indicates continued sluggishness in global trade vis-a-vis India. The key drivers for the YoY decline in July 2009 have been Haldia (-29.4% YoY) and Cochin (-10.1% YoY) ports. This decline was offset by increase in cargo volumes at Paradip (22.2% YoY), Mormugao (19.0% YoY) and Kolkotta (18.9% YoY) ports. Segmenting the data by commodity (YTD-FY10 vs YTD-FY09), thermal coal volumes have risen 20.4% YoY, but coking coal volumes have fallen 24.3% YoY, with all other commodities being almost flat. Container volumes are down 5.4% YoY. However, monthly trends reveal slow but steady increase in Iron-ore, thermal coal and container volumes, while coking coal volumes have been steadily decreasing.

Mundra Port consortium bags concession to operate Coal Terminal at Mormugao Port Terminal's

Mundra Port consortium bags concession to operate Coal Terminal at Mormugao Port MPSEZ has announced that it has won the concession to operate a coal terminal at Mormugao port. The concession is on a DBFOT (design, build, finance, operate and transfer) basis for a period of 30 years. MPSEZ has won this concession in consortium with Adani Enterprises (Not Rated). The coal terminal is expected to have a capacity of 6.5 MnMT per annum at an estimated cost of Rs252 crore. The revenue share agreed with Mormugao Port is 20%. The coal terminal is likely to begin operations in FY12. The concession agreement is scheduled to be signed on 27th August 2009 and the official date to operationalise the project is 28th February 2013, i.e. three years from starting of work on the project. MPSEZ expects to fund the project through internal accruals as its equity portion, and debt-financing the balance portion. I expect this news to have a positive impact on the company.