Power Q2FY19 Results Preview: Margins expected to expand as moderate rise in generation and high merchant prices offset high coal prices

Power generation (excluding solar and wind) rose 5% yoy in Q2FY19. This is much higher than the 2.9% yoy increase seen in Q1FY19. Thermal power saw a 3% yoy increase in generation as low coal stocks hit generation volumes.

Oct 20, 2018 08:10 IST India Infoline News Service

Power generation rises 5% yoy in Q2FY19 as state discoms significantly increase offtake in the short-term market
Power generation (excluding solar and wind) rose 5% yoy in Q2FY19. This is much higher than the 2.9% yoy increase seen in Q1FY19. Thermal power saw a 3% yoy increase in generation as low coal stocks hit generation volumes. However, hydropower saw a 14.5% increase in generation volumes in Q2FY19, helping in overcoming the shortfall.

A large part of the unseasonal demand was addressed through the short-term market. In Q2FY19, the Indian Energy Exchange (IEX) saw a ~17% yoy rise in volumes as offtake from state discoms picked up sharply in September 2018.
Thermal power stations hit as coal stocks shrink to 11mn tonne by end of September 2018
Thermal power generators have been impacted by low inventory levels across the country, especially private power generators. Coal stock levels have shrunk by 28% from 15.45mn tonne to 11mn tonne in Q2FY19. This low inventory has been due to higher power demand from thermal sources due to (1) low hydropower generation, and (2) high offtake by state discoms in the short-term power market.
High merchant prices, high power demand to help boost margins for generators
Prices on the IEX spiked sharply in Q2FY19, reaching a peak of Rs6.53 per unit in September 2018. As a result of the spike in the offtake in September, we estimate that the average clearing price for Q2FY19E stands at Rs3.94 per unit (up 20.6% yoy). We expect EBITDA margins for generation companies in the coverage universe to expand 355bps yoy as pressure from higher coal prices is likely to be offset by the spike in merchant prices. However, unavailability of domestic coal has led to the shortfall being met through imports. As a result, coal imports have risen 14% yoy in 5MFY19. This presents a possible negative surprise to earnings estimates.
Margins for hydropower generators (NHPC) would also see a sharp yoy rise due to higher merchant power prices. PSU power companies like NTPC are likely to see 440bps yoy improvement in EBITDA margins for the same reason. However, private generation companies like JSW Energy are likely to see a 438bps yoy decline in EBITDA margin, as (1) its thermal plants rely on imported coal, and (2) shortage of domestic coal has hit private producers harder than PSU generators.
We have a positive stance on Powergrid, CESC, and IEX.
Q2FY19E Q2FY18 YoY Q1FY19 QoQ
Sales 2,134.0 2,088.00 2.2 2,159 -1.2
EBITDA 522.0 514 1.6 495 5.5
EBITDA margin (%) 24.5 24.6 -16 22.9 153
PAT 251.7 247 1.9 182 38.3
CESC is likely to report a slight 2% yoy increase in revenues with a 1.6% yoy increase in EBITDA. Earnings performance will likely remain in line with revenue growth with a 16bps yoy decrease in EBITDA margins due to higher fuel costs. Management commentary on upcoming demerger and performance of subsidiaries (Spencers, CESC Ventures) is something to keep an eye on.
JSW Energy
Q2FY19E Q2FY18 YoY Q1FY19 QoQ
Sales 2,330.0 2,049.04 13.7 2,360.6 -1.3
EBITDA 901.3 882.38 2.1 776.24 16.1
EBITDA margin (%) 38.7 43.1 -438 32.9 580
PAT 303.9 296.83 2.4 229.2 32.6
Revenue is expected to rise by 13.7% yoy due to (1) 7% yoy increase in generation volumes, and (2) higher realizations in the merchant power segment. EBITDA margins are expected to contract 438bps yoy due to (1) sharp increase in international coal prices to $113 per tonne by end of Q2FY19 (up ~14% yoy), and (2) weakness in the INR. PAT is expected to increase marginally by 2.4% yoy due to a sharp reduction in interest cost.
Q2FY19E Q2FY18 YoY Q1FY19 QoQ
Sales 20,903.6 20,774.37 0.6 22,703 -7.9
EBITDA 6,169.0 5,217.69 18.2 5,954 3.6
EBITDA margin (%) 29.5 25.1 440 26.2 329
PAT 2,590.35 2,360.81 9.7 2,588 0.1
Revenue growth is likely to remain flat given that power generation remained flat at 65bn units in Q2FY19. Plant availability for NTPC is likely to improve sequentially in Q2FY19, reducing the impact of fixed cost under-recovery seen Q1FY19. Management's commentary on commisioning and commercialization of new capacities is key to gauging future prospects.
Q2FY19E Q2FY18 YoY Q1FY19 QoQ
Sales 2,460.1 1,971.69 24.8 2,128.9 15.6
EBITDA 1,652.4 1,114.95 48.2 1,290.5 28.0
EBITDA margin (%) 67.2 56.5 1,062 60.6 655
PAT 1,017.4 876.05 16.1 737.6 37.9
Revenues are expected to increase 24.8% yoy in Q2FY19E due to  (1) 8% yoy rise in generation volumes, and (2) higher realizations. These higher realizations are likely to support a 1,062bps yoy expansion in EBITDA margins. Earnings are not comparable on a sequential basis due to seasonally strong generation in Q2FY19.
Q2FY19E Q2FY18 YoY Q1FY19 QoQ
Sales 8,413.3 7,252.84 16.0 8,127 3.5
EBITDA 7,293.3 6,474.88 12.6 6,927 5.3
EBITDA margin (%) 86.7 89.3 -259 85.2 146
PAT 2,321.25 2,059.95 12.7 2,241 3.6
Powergrid is likely to report capitalization of ~Rs6,500cr leading to regulated equity addition of ~Rs1,900cr. Thus, we expect revenue and PAT growth of 16% yoy and 12.7% yoy, respectively. EBITDA margins are expected to go down by 259bps yoy due to higher employee cost.
Tata Power
Q2FY19E Q2FY18 YoY Q1FY19 QoQ
Sales 7,626.4 7,657.30 -0.4 7,313.4 4.3
EBITDA 1,590.3 1,585.64 0.3 1,770.8 -10.2
EBITDA margin (%) 20.9 20.7 14 24.2 -336
Adjusted PAT 386.1 -25.4 -1,618.8 17.7 2,084.6
Revenues are expected to remain flat yoy as higher revenues from the coal and renewables segment are offset by lower revenues from the Mundra and Maithon plants. Deleveraging exercise remains a key monitorable. PAT of Rs386cr is expected due to lower losses at Mundra and higher profits from the coal segment. Commentary on the plea to Supreme Court regarding Mundra tariff remains a key point to monitor.
Indian Energy Exchange
Q2FY19E Q2FY18 YoY Q1FY19 QoQ
Sales 71.7 55.82 28.5 67.0 7.1
EBITDA 57.5 46.55 23.6 54.5 5.6
EBITDA margin (%) 80.2 83.4 -319 81.3 -111
PAT 44.0 32.66 34.8 41.9 5.1
Revenue growth of 28% yoy is supported by (1) 17% yoy rise in DAM volumes, and (2) 313% yoy rise in REC volumes. EBITDA margins are expected to contract 319bps yoy due to higher employee costs. PAT is expected to rise 35% yoy due to a lower tax rate for FY19.

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