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Power - Setting the stage - ICICI Securities

Posted On: 2020-09-24 08:31:09


Ministry of Power (MoP) has released two important drafts which are expected to play a positive role in the ministry's efforts to find a long-term solution addressing power sector's concerns. The first - Draft Electricity (Rights of Consumers) Rules, 2020 - is aimed at: 1) Empowering consumers under Electricity Act, 2003 to demand 24x7 power; 2) ensuring compensation from distribution licensee (DL) in case of non-performance/ underperformance; 3) providing rules for facilitating/improving services including connection, metering, billing, grievance redressal and call centre facilities; 4) providing rules for standardising DL performance consumers as prosumers. The second - draft standard bidding documents (SBD) for privatisation of DLs - is aimed at accelerating private sector participation in distribution utilities by 1) standardising bid procedures, timelines and documentation requirement; 2) providing two shareholding alternatives, bid parameters etc; 3) providing a clean balance sheet to DL acquirer and 4) providing transition support wherever required. Along with the above, loans worth Rs247bn disbursed through PFC/REC scheme (progress has been slow till now as only 20% of the amount has been disbursed) and better-than-expected power demand recovery (peak/daily demand for Sep'20 MTD are higher YoY by 1.1%/1.7%) gives us further room for optimism in the sector.

- What to expect from new draft rules/guidelines: We believe implementation of consumer rights rules will result in states being forced to either turnaround loss-making discoms themselves or through privatisation route (which will be easier). The consumer rights rules ensuring all consumers right to 24x7 power and compensation in case of inadequate/non-performance by DL will ultimately lead to significantly lower power cuts and thus increase the overall demand (which is currently latent), and thereby, PLFs (incremental coal PLFs to improve). Discoms will be forced to to improve power supply and not undercharge which will result in lower and interrupted power supply (in case where ARR
- Daily demand continues to improve: On YoY basis in Sep'20, all-India daily/peak demand is higher by an average of 1.7%/1.1%. Improvement in industrial demand combined with higher temperatures in the northern region has been the major factor behind this improvement, despite monsoons continuing in many parts of the country. For Sep'20 (till 19th), conventional power generation is 3.9% higher, backed by higher thermal PLFs, which has helped recover YTD power generation to -9.8% YoY. Thermal power generation during the same period is higher (+8.3% YoY), but hydro generation is lower (-11.5% YoY). This resulted in improved coal offtake as well. MTD till 15th Sept'20, CIL's production was up 21% YoY at 19.6mnte, while offtake was up 22% YoY at 23mnte. Coal inventory at plants has also declined to 19 days. In case of renewables, Sep'20 (till 22nd) witnessed higher solar generation (+ 34% YoY) on the back of higher capacity, but lower wind generation (-28% YoY) due to erratic wind patterns.

We continue to maintain that the immediate requirement in the sector is to take actions to resurrect lost/latent demand. Although PFC/REC scheme provides short-term relief, the two draft guidelines will play their part in bringing a long-term solution. Discom privatisation is a growth area for most private companies in the sector. Currently, as per MoP, privatisation of three UTs - Chandigarh, Puducherry, Daman & Diu - should be completed in FY21, while there is significant action in states such as Odisha (1 circle has been privatised already and for balance 3 bidders have been identified), UP, Jharkhand, etc.

We remain positive on CPSUs as their earnings are based on capacity creation and not utilisation, and they continue to trade at all-time low valuations and high dividend yields (almost all PSUs in the power space have higher dividend yield than the current 10-year G- Sec yield). Recovery in coal PLFs bodes well for NTPC and has improved coal offtake by Coal India. We expect further improvement in coal PLFs and thereby, coal offtake Q3FY21 onwards. Although the Electricity (Amendment) Bill, 2020 could not be placed during the monsoon session of the Parliament since the session was short, we expect it to be placed and passed during the winter session. Further, we expect draft of the National Tariff Policy to be released soon. Top picks are NTPC and Coal India.


Source: Equity Bulls

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