Eoin Treacy's view -
Why retirement? Substantial savings for state utilities, better efficiency
India is planning a retirement policy to dispose of 18% of India’s coal-fired old capacity (36GW) over 5-6 years, starting with 6GW (2.2%) by Mar’17. Stringent new pollution norms and a coal linkage transfer policy have been instigated to hasten the retirement. Retirement will lower coal consumption by ~30% and will also cut pollution and reduce the tariff burden for state utilities.
Replacement is warranted and pressing
The states’ role in power generation is declining and will trigger a new capex cycle, for energy security. Additionally, with shut-downs we estimate annual requirement of 19-22GW projects to avoid power shortages. Government (CEA) estimates corroborate the requirement of 24GW annually. Rising PLFs should exceed the 2008 peak by FY19-20e, necessitating further investments now – as the power project cycle is six years from concept to commissioning.
Stage-I Capacity utilisation recovery to benefit utilities (Prefer NTPC)
With higher retirement and lower supply addition (just a 2% CAGR over FY17-22E) – we believe capacity utilisation rates are likely to stage a strong recovery. We raise PLF estimates for utilities by 2-3pps beginning FY18E. With 37% volume growth over four years and valuations still at a c20% discount to the historical average, the sector looks attractive.
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Revitalising the electricity utility sector to remove outdated coal fired stations and to build new more efficient operations is a very positive development. It is also a testament to the ability of the new government to remove roadblocks to Indian infrastructure development that investors despaired would ever be achieved under the last administration.
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