>INDIAN INFRASTRUCTURE (DEUTSCHE BANK)

JSPL stands to gain from new spot tariff norms

■ Regulator favours low-cost players; JSPL remains our top sector pick
Fresh data points from regulators on the short-term market suggest (1) that the Central Electricity Regulator (CERC) is looking to set a short-term price cap of INR11/kWh vs. INR5-6/kWh as proposed earlier; and (2) low-cost power producers will continue to make good returns. Our sensitivity analysis shows that if shortterm rates remain at INR6/kWh, then JSPL’s earnings could increase by 12% in FY10E and 18% in FY11E. For Tata Power, earnings could be up by 4% in FY10E. JSPL remains our top sector pick.

■ New CERC policy favours low-cost players
The CERC’s latest regulations on the short-term price ceiling suggest a cap on the super-normal returns for high-cost gencos (naphtha + DG sets). However, a price ceiling of INR11/kWh implies that the low-cost gencos such as JSPL could potentially earn RoEs of 47% (only for power). Note that JPSL’s cost of power generation could fall from INR2.75/kWh in FY10E to ~INR0.8/kWh by FY12E, which would ensure high profitability even if merchant tariff were to fall to INR3.5/kWh, in line with regulated tariff levels. Potential earnings upside of 12% in FY10E and 18% in FY11E for JSPL A simple sensitivity analysis of our earnings model suggests that if short-term tariffs remain at similar levels throughout Q1FY10, an average of INR6.4/kWh in FY10E and INR6/kWh in FY11E, then JSPL’s earnings could increase by 12% in FY10E and 18% in FY11E. Note that our earnings estimates are above consensus by 7% in FY10E and 18% for FY11E. Likewise, for Tata Power, earnings could go up by 4% in FY10E and 6% in FY11E at the consolidated level.

■ Reiterate JSPL as our top pick
Recent statements by the Ministry of Power seem to suggest continued slippage in new power capacity addition programmes. We find that JSPL is possibly the only large-cap utility stock trading at a discount to NPV. Our target price of INR4150/sh implies that power assets valued at 19.7x FY10e and steel assets at 10x FY10e. Note that JSPL’s earnings are understated by 15-20% in FY10E due to cost front-loading in power. For investors looking for exposure to regulated markets, NTPC emerges as a better player vs. peers. Reliance Power continues to be our top Sell-rated stock. Key risks include delays in implementation, the imposition of a regulatory cap on the spot tariff below INR4/kWh, and a significant drop in fuel costs.

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