Power sector to report weak Q2 numbers as offtake remains weak

Utilization levels of power plants under pressure as capacity addition increases by 11% YoY but supply grows 6%

That the power sector is faced with debilitating supply-side issues (availability of coal and gas) has been discussed ad nauseam. But with economic growth falling to sub-5% levels, the sector is seeing a sharp slowdown in demand from one of its most profitable segment -- industry. In India, industry subsidizes power for segments like domestic and rural as it pays the most. With industrial growth contracting, the demand for power is down from industry, even as the sector continues to add new capacity.

In FY13, the country saw 11.7% increase in power generation capacity but supply grew by only six%. Compared to last year, power generation grew 8.3% in Q2 and 3.26% growth in the first quarter of the current fiscal. Compared to last year, generation has more than doubled in the second quarter of the current fiscal but offtake of power is languishing.

Between April and August this year, demand from industrial and commercial consumers has fallen sharply. The share of industry in overall power consumption was 62% last year, but it is down to 44% in the current year.

According to ICICI Securities, if power demand grows at 5% (adjusted for benefit of reducing AT&C losses) untied capacities (high marginal cost), gas based capacities and even part of linkage coal capacities would face lower utilisation. An extended monsoon has also affected demand for power.

Other than demand for power slowing, the financial health of most state-owned distribution companies remains fragile, which has affected their ability to buy power. Thus, states are opting for load shedding. The plant load factor of thermal plants between April and August 2013 has declined to 64% from 70% seen during the same period last year.

Offtake of power is now becoming as critical as the availability of fuel. If power consumption continues to grow at 5-6%, the generators will continue to function with lower plant load factor (PLF). Analysts say that demand for power has to grow at 9%, if coal-fired power plants have to achieve 75% PLF.

Weak power offtake would hurt high--cost power plants, which are functioning on expensive imported coal or gas. Weak demand for power is also reflected in muted merchant power prices, which declined 16% in the second quarter. A lot of these issues would be reflected in the second quarter numbers of power companies.

According to SBIcap Securities, Powegrid and CESC may fare better than others in Q2. The brokerage expects JSW Energy to report weak numbers mainly due to backing down by discoms. NTPC too is expected to report flat growth in generation and a 11.1% fall in sales and 26% fall net profit.