Muted profitability likely

While the overall revenue growth of the power utilities will be supported by capacity additions, the profitability is expected to be affected by higher input costs and lower merchant power tariffs. The leading nine companies in the power sector are likely to report about 13 per cent year-on-year growth in revenues to Rs 23,832 crore since the players have witnessed higher operating capacities.

About 2,142 Mw was added during the first two months of the quarter, while the all-India generation improved by 2.4 per cent y-o-y to 132 billion units in July and August. The aggregate coal-based plant load factors (PLFs) were down 300 basis points (bps) to 74 per cent in 2010-11. That happened due to capacity additions, but gas-based PLFs improved 200 bps to 69 per cent owing to better availability of gas from the KG-D6 gas block.

However, the profitability is likely to be muted, thanks to higher input prices and fixed costs. The operating profit is expected to grow 3.4 per cent at Rs 7,168 crore as the spot global coal prices are up about 30 per cent y-o-y. The average merchant (short-term) tariffs were also down 35 per cent y-o-y and 42 per cent sequentially to Rs 3 per unit on account of the better monsoon and hence, higher hydropower generation.
 

MARGIN PRESSURE
In Rs crore	P/E (x) FY12E	Sales		Net profit
		Q2FY11E	% chg	Q2FY11E	% chg
GMR Infra*	51.5	1,262	5.7	41	-25.0
GVK Power*	18.8	503	2.3	39	-11.4
Lanco*	13.8	2,191	13.8	154	25.6
NTPC	17.8	12,517	11.2	1,989	-7.6
Tata Power**	2.3	2,036	18.3	215	17.9
CESC	9.4	1,005	4.2	128	1.5
NHPC	22.2	1,377	10.4	672	8.8
Torrent Power	13.2	1,847	27.3	279	32.9
Neyvelli Lignite	20.5	1,095	24.2	269	10.2
* Consolidated;  ** Standalone;  % change is y-o-y;     Source: Analysts Reports

The net profit growth is also expected to be flat because of higher interest and depreciation costs, especially for the private players as most of their power capacities are under construction.

NTPC, the largest power producer accounting for over 50 per cent of the aggregate revenues among the nine companies, is likely to witness 11 per cent growth in the top line but its operating profit and net profit are likely to decline by 11 per cent and 8 per cent, respectively.

The same trend of relatively higher growth in sales and muted profitability is expected to continue for the sector even in the coming quarters. This is because the capacities would keep getting added (only 19 per cent of the total target of 21,500 Mw has been achieved in 2010-11 so far along with a 53 per cent achievement rate in the 11th Plan), input costs are on the rise and merchant prices are headed downwards.

With the slow pace of capacity additions and slippages in execution, the outlook for the sector is cautious. The average valuation of 19 times the 2011-12 estimated earnings factors in the higher growth expectations. Analysts expect a stock-specific upside depending on the pace of execution of projects under construction. Likewise, companies like Tata Power which have exposure to coal assets will see their valuations getting influenced by movement in coal prices globally.