Coal Crunch: IEX Offering Strong Earnings Play For Near-Term; Valuations Bit High, Says Axis Capital – EQ Mag Pro
IEX does offer an opportunity to play strong earnings outlook in the near term. The earnings growth outlook is pretty robust, although valuations have started looking a bit high, said Sumit Kishore, ED-capital goods, power and infrastructure, Axis Capital, adding that the risk of market share loss for a monopoly appears more prominent because before the end of the year, we would have the third electricity exchange Pranurja Solutions Limited, which would be operational.
The Power Ministry has taken stock of the coal shortage, which has pushed electricity prices higher amidst rising power demand. So the Ministry is planning to regulate and redistribute coal supplies. It has also proposed utilising the idle 6000-megawatt capacity in Mundra, Gujarat. Moreover, the government is proposing to allow Adani Power, Tata Power to sell power from Mundra unit on exchanges.
In an interview with CNBC-TV18, Sumit Kishore, ED-capital goods, power and infrastructure, Axis Capital, said, “Even at elevated import coal prices currently, the variable cost is about Rs 3 per kilowatt-hour for Mundra projects.
The average price on IEX was around Rs 5 per kilowatt-hour in August. So logically it makes sense for power distributing companies (DISCOMs) to buy power against long-term power purchase agreements (PPAs), wherever the variable cost is less than the exchange-traded price. However, the elevated prices seen on exchanges are a short-term phenomenon, as it would attract generation companies who are not tied up in PPAs to sell on exchanges and the market demand-supply dynamics would then necessitate cooling-off of exchange prices.”
He further said, “The surge in prices and high volumes on IEX has been supported by the fact that coal stock at power stations is depressed around the monsoon season and a number of coal stations are shut for maintenance or due to forced outages and the peak wind season is also behind us. As the coal availability normalises over the next month or so, these proposals like Mundra Project selling power on exchanges will also die down. I think it is ironic that as no compensatory tariff for Mundra Ultra Mega Power Project (UMPP) has been disallowed by the same states, which are buying a lot more expensive power on the exchanges presently.”
He mentioned, “IEX is a key beneficiary because of the dynamics described earlier, the July, August volumes on IEX are up almost 50 percent on a year-on-year (YoY) basis. This provides visibility of strong earnings growth in the upcoming September quarter and this has rubbed off well on the stock performance too.”
On the stock performance of IEX, Kishore said, “It does offer an opportunity to play strong earnings outlook in the near term, for the balance fiscal, we think that the timeline for launch of long-duration contracts and resumption of REC trading continues to slip. So the risk of market share loss for a monopoly appears more prominent because before the end of the year, we would have the third electricity exchange Pranurja Solutions Limited, which would be operational.“
“Over the medium term, we see risk of implementation of MBED and market coupling leading to a potential risk to the monopoly position that IEX enjoys today. But near term, the earnings growth outlook is pretty robust, although valuations have started looking a bit high,” Kishore added.
When asked how the risk-reward looked for Tata Power, which was their top pick, Kishore said, “Tata Power, despite the rally we have seen from COVID lows, is just about trading at levels seen back in 2010 to 2012.
This is a 107-year old utility, which has largely overcome the baggage of Mundra UMPP, which as you know was Rs 180 billion project with an unremunerative contract. Tata Power is looking at clean compounding now with a target of growing profits almost three times and ROE two times over FY21 to FY25. So we think that the incremental growth is clean and green, it is ESG compliant. It is led by renewables, both solar independent power producer (IPP) and solar EPC business and within solar EPC, there is utility-scale solar EPC and compounding of growth in EPC for solar rooftops, solar pumps. We think that regional renewable IPPs in North America and Europe are trading at a much steeper multiple on the EBITDA basis and the underlying valuation for the renewables in Tata Power still affords value.”
Source : cnbctv18
