March quarter earnings of power sector companies are unlikely to set the markets on fire. After a tepid December quarter, the now familiar woes of fuel scarcity, lower purchases by state electricity boards and higher costs are expected to dent earnings in the three months ended March as well.
Electricity generation growth in the March quarter is the lowest in the just-concluded fiscal year at 4.27% year-on-year, according to provisional numbers from the Central Electricity Authority. Generation grew by 10.74% in the September quarter and 8.84% in the December quarter.
The deceleration in power generation happened despite slightly better coal availability in the March quarter. Capacity utilization for thermal power plants has increased to 77.66% compared with 74.23% in the three months ended December, official data shows. But these numbers are still lower than what they were a year ago, indicating that the fuel scarcity problems haven’t gone away.
This has added to the costs of thermal power generators, who had to rely on imported coal. While global coal prices declined by 10-11% during the quarter, this was largely offset by the rupee falling at a similar rate.
There is a silver lining in the form of merchant power prices improving in recent times. However, brokerage Prabhudas Lilladher Pvt. Ltd reckons that the average merchant rate in the March quarter stood at Rs 3.5 per unit compared with Rs 4.6 in the three months ended December, despite elections in three states.
CESC Ltd, which hiked tariff during the quarter, and Power Grid Corp. of India Ltd, which has been fast-adding capacity, are likely to be the companies with the best earnings growth in the quarter gone by.
On the other hand, companies such as Adani Power Ltd, which have to rely on imported fuel and haven’t been able to pass on fuel costs, could be under pressure.
The outlook for the next couple of quarters doesn’t change much. While the government has arm-twisted Coal India Ltd to assure long-term supplies, things won’t change much for power producers unless local fuel output increases. They will still have to bear the higher costs of imported fuel.
The silver lining is that many states are announcing tariff hikes, which will improve the cash flows of state electricity boards, enabling them to pay their dues. But unless there are concrete reforms, power sector stocks are unlikely to be re-rated in the near future.
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