CERC's Renewable Energy Tariff Regulations to boost sector

In line with the objective to attract new investments in the power sector, and specifically, to promote renewable energy, the CERC, which regulates inter-state power sector, announced new tariff regulations for grid-connected renewable energy power projects. These regulations assure developers of a higher return on the equity invested and indirect incentives if the developer can contain capital and operational costs. In India, only 8.7% of the total grid-connected power capacity is attributable to the renewable energy segment. Thus at an installed base of 13,242MW, this segment constitutes merely 21% of the potential 62,853MW from only small hydro and wind power. The potential of solar, biomass and waste-based power projects is estimated to be a further 625,500MW, of which solar-based projects alone contribute 600,000MW. Thus, the solar segment alone has the potential to fuel India's entire present electricity requirement. We believe that the overriding philosophy of these new regulations is to promote power generation from renewable energy sources by giving a preferential/differential tariff to such projects. This, we believe, will go a long way to help achieve the target of 15% of total generation from renewable energy sources by 2020, a target set under the National Action Plan on Climate Change. Full Report is available here.

Pipavav Shipyard IPO Analysis - Avoid

The Pipavav Shipyard, jointly promoted by SKIL and Punj Lloyd, has set-up an integrated shipbuilding and fabrication facility. Once the fabrication facility is completely operational, Pipavav Shipyard would be the largest shipbuilding site in India capable of manufacturing ships up to 400,000 DWT (dead tonne weight) and fabricate and construct offshore supply vessels (OSVs). Pipavav Shipyard comprises two sites. The SEZ unit is located on ~95 hectares of land and an EOU located on ~103.92 hectares of land (benefits of which are available till FY12). The construction of the shipyard (excluding the offshore yard) is expected to be completed in Oct-09. Key Data Opening Date 16 Sept 2009 Closing Date 18 Sept 2009 Price Band Rs55-Rs60 No of Shares on Offer (mn) 85.45 Total Post-Issue O/s Shares (mn) 665.80 Market Capitalisation (Rs Bn) Rs36.62-Rs39.95 Project Costs (Rs Mn) Purpose Total Cost Invested (till 15 July 2009) Investment from IPO Proceeds Construction of Shipbuilding & Ship Repair facilities & Offshore Business 25,661 19,844 1,793 Working Capital Margin 4,290 1,016 2,440 Total Project Cost 29,952 20,860 4,233 Order Book Pipavav Shipyard has a current order book of Rs44,596 mn (USD931.63 mn). This order book requires the company to deliver a total of 34 vessels, including 12 OSV's for ONGC. Of the below detailed order book only Rs23,234 mn are firm orders. These firm orders are for 10 panamax size vessles and 12 OSVs. Of the balance Rs21,362 mn, orders for 8 panamax vessels worth Rs14,469 mn are under re-negotiation and an order worth Rs6,893 mn (4 panamax size vessels) is under arbitration. Customer Order Value No of Vessels Vessel Type Status Remarks Rs Mn USD Mn Golden Ocean 17,880 373.52 4 Panamax Firm Order Agreement AVGI 6 Panamax Firm Order Agreement Golden Ocean 3,411 71.26 2 Panamax Firm Order Agreement Under renegotiation to grant option to delivery of vessel, option exercisable until 31-Dec-10 AVGI 11,058 231.00 6 Panamax Firm Order Agreement Under renegotiation to grant unilateral right to customer to terminate the contract if it is unable to arrange funding Setaf 6,893 144.00 4 Panamax Firm Order Agreement Under arbitration SUB-TOTAL 39,242 819.78 22 ONGC 5,354 111.85 12 Offshore Supply Vessel (OSV) Fixed price contract TOTAL 44,596 931.63 34 Subsidy on Shipbuilding The Government of India had instituted a shipbuilding subsidy scheme wherein shipbuilders could avail a 30% subsidy on the cost of the ship being built from the government. The caveat is that the shipbuilding order should have been placed before 14-Aug-07. Based on this criteria, all of the present order book of Pipavav Shipyard qualifies for this subsidy. This subsidy is available only on vessels ordered through the ICB (International Competitive Bidding) route, and hence the government has assurance of the subsidy demanded being within reasonable parameters. Further, the benefits are capped at 30% of the order value, thus benefits accruing on account of the SEZ / EOU status would decrease the actual cash subsidy that the company is eligible to receive. The cost advantage that India offered, along with the subsidy provided by the Government (up to August 2007) helped improve the order inflow in the past 2-3 years. In addition, the Indian shipbuilding industry benefitted from orders being passed on from the traditional shipbuilding countries - Korea, Japan and China - as these were fully booked. In the near future, the capacities at these shipyards is likely to be freed up, resulting in increased competition. But most importantly the 30% subsidy incentive will not be available, and hence force the Indian shipyards to compete on a purely cost advantage basis, if any. Comparative Valuations Pipavav Shipyard ABG Shipyard Bharati Shipyard Lower End Upper End Order Backlog Rs Mn 44,596 44,596 124,700 33,000 EV / Order Book (FY11) x 1.1 1.2 0.3 0.4 P / E (FY11) x 4.6 5.0 5.2 3.5 On a comparative basis, though Pipavav Shipyard's superior dockyard, product facilities as well as business potential from Punj Lloyd - a co-promoter - do deserve some premium to the peer-set, we believe that the inherent nature of the business continues to be cyclical, and the lack of proven execution (vessel delivery) track record correspondingly requires a discount to the same peer-set. We thus, believe that the premium demanded is unjustified, and the stock would be available at more reasonable valuations in due course.

CERC caps power exchange tariff rates at Rs8 per unit and allows new weekly contracts

Since CERC's order to cap to the day-ahead power tariffs, these have been averaged to Rs2.91 per unit. On Friday evening, CERC issued its final order in this matter and has tightened the price cap from Rs11 per unit in its draft order to Rs8 per unit now. The present order is valid for a period of 45 days. The change in pricing for the day-ahead tariffs is shown in the graph above. Since the earlier order, the highest price has been Rs10.5 per unit, and this too was on the day after the order. If this is excluded, the highest tariff was Rs6.00 per unit. We believe that this clearly highlights the effectiveness of CERC in curbing the abnormal tariffs at which power was being traded. Given that since the draft order power traded has been at a maximum rate of Rs6.00 per unit, we believe that this final order capping the day-ahead power tariffs at Rs8 per unit for a period of 45 days would not have any impact on the stock prices of companies selling merchant power. The companies dealing in merchant power are the likes of GMR Infra, JSW Steel, JSPL, Nava Bharat, etc. We reiterate our sell recommendation on GMR Infra with a target price of Rs110. We do not expect power trading companies, like PTC India, to be impacted by this order as their margins are independent of this order, and capped at 4 paise / unit, irrespective of the power tariff or the volume. In a related move, the CERC has permitted the power exchanges to introduce new contracts. The IEX is hence introducing the following contracts from 15-Sep-09: Region-wise intra-day contracts: are contracts for delivery of power on the same day. These contracts would be avaiable on a hourly-basis from 19:00 hours to 24:00 hours only. Thus, only six hourly contracts would be available in this product. Regional day-ahead contingency contracts: These are similar to the existing day-ahead product, except that these would be traded at the end of the day (between 3:00 PM and 5:00PM). We believe that this would help those buyers / sellers who otherwise were not able to buy / sell during the normal segment, or received late instructions from their PPA counter-party with regard to power supply the next day. Region-wise daily contracts: These are week-ahead contracts for supply of daily/hourly power. These contracts are available for the following blocks: (a) 8-hours night period; (b) 11-hour day period; (c) 5-hour evening peak; and (d) full day or 24-hour period. Region-wise weekly contracts: There would be contracts specifc to each region (north, south, east, west and north-east). In addition, these would be available in four time blocks: (a) 8-hours night period; (b) 11-hour day period; (c) 5-hour evening peak period; and (d) full day or 24-hour period. It should be noted that all these new contracts are also based on actual delivery and cannot be settled in cash. To us the biggest take-away is that the regulator is open to introduce longer duration contracts in power trading. We believe that more longer duration contracts would be permitted sooner rather than later ensuring a deeper power trading market.

GMR Infrastructure Analyst Meet Update

GMR Infrastructure Analyst Meet Update We attended GMR Infra's Analyst Meet yesterday. Mr GM Rao address the analysts' after a gap of about three years, i.e. the first time after the IPO. The key takeaways from the analyst meet are: Mr GM Rao gave the gathering a detailed view of the group from the beginning to date, and his idea of building a strong and long-lasting institution which could continually grow. He also mentioned that the group has an internal benchmark hurdle rate of at least 16% IRR for all their projects. The presentation mainly concentrated on a brief about the various operational and the under-development projects. Airports - Delhi, Hyderabad and Turkey Power - 823MW of operational power projects, 5,610MW of under development thermal power projects, and 1,190MW of under development hydro power projects. These include two hydro power projects (550MW) in Nepal. In addition, GMR Infra has acquired a 800MW under development gas-based power plant in Singapore. GMR Infra's parent company has acquired a 50% stake in InterGen which operates 8,086MW of power plants in various locations across the globe (UK, Netherlands, Mexico, Philippines and Australia). Roads/Highways - six operational highway projects (three annuity-based and three toll-based), and two recently awarded under development projects. Urban Infrastructure - this vertical mainly centres around developing SEZ's. The group is developing a SEZ at the Delhi International Airport, two at the property around the Hyderabad Airport, and one near Chennai. The last few slides on the presentation detailed the present debt-equity position of the group. The presentation states that the present Networth is Rs84.25 bn, while its debt stands at Rs123.38 bn, indicating a debt-equity ratio of 1.5. It was further highlighted that on a standalone basis GMR Infra has a net cash position of Rs3.23 bn. The debt on the books of the various project SPV's is Rs126.61 bn. To underscore the debt position, the management then highlighted the debt in each of the various project SPV's and mentioned that the debt is largely on a non-recourse basis to GMR Infra, with the door-to-door tenor varying from 10 years to 17 years. Lastly, and in our view most importantly, the management indicated that they would be required to raise equity of Rs60.0 bn in the current fiscal, and another Rs15.0 bn within the next two years. This equity is planned to be raised as under: Funding Raising Details Company / Entity Raising Equity Rs Bn GMR Infrastructure 25 GMR Energy 15 GMR Roads Holding Company 5 GMR Airports Holding Company 15 Total Equity Issuance Planned in FY10 60 GMR Infrastructure International (by FY12) 15 Total Equity To Be Raised 75 It may be recalled that during the FY10Q1 results conference call the management has stated that they would not be raising any equity in the current fiscal and the funding requirement was not immediate (with the exception of small equity infusion required in the recently awarded road / highway projects). We, however, have estimated that the group would need to raise Rs45 bn in equity and another Rs182 bn as debt over the next three years. Our estimate for the equity requirement is lower as it is based only on the existing projects at hand. We believe that the incremental equity issuance would partly take care of the funding requirements stemming for newer projects. At current valuations, we do not believe the market factors in the risk associated with multiple projects, and execution issues therefrom. We find it difficult to justify the growth premium accorded by the market to the stock. P.S.: The shareholder's have approved a stock split from a face value of Rs2 per share to Rs1 per share. The record date for the stock split is 3rd Oct-09