SECTOR WATCHPOWER TRANSMISSION AND DISTRIBUTIONSUBMITTED BY – ADITYA GOYAL, BITS PILANI

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Generation• Many Private

companies and PSUs are involved.

• India is the 3rd Largest Producer of Power.

• Hosted a CAGR of 8.7% (2010-16)

• 100 per cent FDI is allowed under the automatic route in the power segment and renewable energy.

• Major Companies – NTPC, Adani Power, Reliance Power, Tata Power, NHPC, CESC Limited.

Transmission• In the central

sector, the Power Grid Corporation of India Ltd (PGCIL), is responsible for national and regional power transmission.

• State sectors have separate State Transmission Utilities (STU).

• Private sector participation is negligible in transmission.

• PGCIL is the premier organization which handles the transmission system of India.

Distribution• Involves a

number of private companies and State-owned Distribution Boards(DISCOMS)

• Considered a weak link in India’s Power Sector.

• Posses Electricity Distribution losses of 23% against a global average of 8.3%.

• Major Private Players- Tata Power, Reliance Infra, Torrent Power, Adani Transmission, Indian Power, CESC Limited.

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CAPITAL FLOW

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PAST AND CURRENT SCENARIO

Weak Link in India’s Power Sector. As a Global Thumb rule, for every penny invested in Power Generation, a penny should be

invested in Transmission and Distribution. Power Generation CAGR for last 5 years is 8.7% while it is 5.8% for Transmission. Massive Problem of Load Shedding, leads to distribution losses of around 23%. Poor

Distribution is the reason for unavailability of sustained electricity even after India being a Power Surplus Nation.

State DISCOMS have extremely poor financials due to years of financial and administrative neglect and usage of power as a political tool. Ill managed Freebies and subsidies granted by State governments have led climbing debts. DISCOMs in the country have accumulated losses of approximately Rs. 3.8 lakh crore and outstanding debt of approximately Rs. 4.3 lakh crore Due to such a beleaguered state of DISCOMS, private companies remain apprehensive of striking deals or PPPs with such entities.

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CUSP OF CHANGE

The current Central Government is determined to change the working and operational standards of this industry and to make the industry sustainable.

Power, Railways and Infrastructure are the three sectors which have enjoyed the greatest interest of the current government.

Ujwal DISCOM Assurance Yojana (UDAY)It is a financial turnaround and revival package for DISCOMS to find a permanent solution to the financial mess that the power distribution is in. It allows State governments to take over 75 percent of their debt and pay back lenders by selling bonds. 11 States have signed up for this optional scheme. With a better financial health they are expected to roll out more viable tenders and take up ambitious projects with a major participation from private sector.

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CUSP OF CHANGEDeen Dayal Upadhyaya Gram Jyoti Yojana(DDUGJY)Flagship initiative of the Modi Government, the scheme is aimed for 100% rural electrification. The scheme has a outlay of 76,000 Crores.  It focuses on strengthening of sub-transmission & distribution infrastructure including metering at all levels in rural areas. Under this scheme, the Government has been actively issuing tenders for increase distribution density.

Power Grid commissioned projects with a 39 per cent growth last fiscal. Almost Rs 30,000 crore worth of projects got commissioned over 24,000 circuit kms.

The easing of financial condition of state power distribution companies (discoms) has opened up a bigger opportunity as the industry expects orders totaling Rs 80,000 crore from them over the next year.

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GROWTH DRIVERS

Demand •Increasing penetration and per-capita consumption.•Accelerated Industrial Growth indicated by GDP increase.

Policy •DDUGJY – 100% Rural Electrification Drive.•UDAY – Destressing of State DISCOMS.•Development of 5 Ultra Mega Power Projects(UMPPs), 4000 MW each.

Investment •Investment for 7 new transmission systems that includes strengthening of national grid have been sanctioned•100 per cent FDI is allowed under automatic route for power sector except atomic energy•Power accounted for 4 per cent of total inflows till September 2015•Power Ministry has announced an ambitious target to award 1 lakh crore worth of transmission projects this year.

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HAWK EYE The sector is a very promising in next few years because of the special attention and top priority status awarded

by the current government. The ambitious 100% rural electrification drive, coupled with organizational and administrative reforms are the growth drivers.

However, there still isn’t a long term strategy or initiative by the Central Government to deal with exuberant power lossages. The Central Government is relaying on recovering DISCOMS to take up upgradation and renovation.

UDAY scheme is a one time revival strategy. However, this doesn’t assure a long term commitment from state governments to maintain the financial health of DISCOMS. As seen in the aftermath of past revival initiatives, DISCOMS might again become junked in upcoming years.

Issue of Land Acquisition and Environmental Clearance still remains a major hurdle being a reason of major delays, especially in transmission projects

One factor for the unenthusiastic response in tramsmission, say experts, is the dominant role enjoyed by Power Grid Corporation of India. Of the ten projects worth Rs 53,000 crore that have been awarded this financial year, the largest project valued at Rs 26,000 crore went to Power Grid on a nomination basis. In addition, the ambitious Green Corridor project, estimated at over Rs 30,000 crore, has also been awarded to Power Grid.

Industry Is Completely dependent on Power Generation Sector for day to day operations. It’s role is widely seen as Value Chain Additive to Generation Sector, so a very high exposure/interpenetration exists with Generation Sector.

Major global exposure to the price of Copper and Steel in international market as the industry uses copper as a major raw material.

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PORTER’S FIVE

Bargaining Power of SuppliersNegligible. Almost all of the transmission companies work collaboratively with the power generation

companies under the parent owner. Since supplier isn’t a beneficiary, the bargaining power is negligible. Bargaining Power of Consumers

Low- Consumers have no direct say in the pricing policy. However, in some cases government intervention and regulation exists. Threat of new entrants

Low - Capital intensive nature of the industry makes it difficult for new entrants. Regulatory approvals, land remain a major problem

Threat of substitutesNo Real Threat exists

Competitive RivalryMedium- Largely Oligopolic structure exists for private players. However, governmental stress on

tariff-based competitive bidding (TBCB) route is bound to increase competitiveness.

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INVESTMENT PICKS

Power Grid Corporation India Limited

KEC International

Reliance Infrastructure

Kalpataru Ltd. CESC

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INVESTMENT PICKS

Crompton Greaves

Transformers & Rectifiers

Larsen and Tourbo

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INVESTMENT PICKS

All prices as on June 28,2016

PGCIL @ 156.00 per share Has received major orders this year, and has been the most aggressive bidder for transmission projects. Has Very Strong Financials and has outperformed its major peers.

KEC International @ 139.30 per share Being heavily involved in Distribution/Related Equipment, it has turned out to be one of the biggest beneficiaries of UDAY Scheme,

being rallied up for distribution renovation projects by state discoms. Has a significant exposure(47% Revenue) and dominant presence in West Asia. With oil recovery on track and a positive sentiment

in these markets, the stock is on an upsurge.

Reliance Infrastructure @ 524.00 per share Posted very positive quarterly results for last two quarters. Its sister company, Reliance Power has also posted very positive

quarterly profits. Company is looking to sell its 11 toll road assets to an overseas buyer for more than $1.5 billion by September. Company has been aggressive on reducing its debt and is going to sell major assets. This can lead to major spikes in coming

months.

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INVESTMENT PICKSAll prices as on June 28,2016

Kalpataru Power Transmission Ltd. @ 249.90 per share Another major beneficiary of UDAY scheme. Sales have jumped 28.9% YoY on faster execution. Order inflow of the company has more than doubled in FY16. It is trading well below its 50-day, 100-day and 200-day moving average of 231.70, 210.37 and 228.72, respectively.

CESC @ 582.95 per share Has won the Power Distribution franchise license for 20 years from the Rajasthan Government utility Jaipur Vidyut Vitaran

Nigam Ltd for two cities – Kota and Bharatpur. Resurging from a decline. Has posted good financials.

Crompton Greaves @ 71.20 per share Company has sold its loss making, debt ridden US T&D Business in March. The company demerged its consumer products business which lead to its single day largest fall. Since then, the company has

committed itself to Indian T&D line and has posted constant comeback from March.

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INVESTMENT PICKSAll prices as on June 28,2016

Larsen and Tourbo @ 1,473.20 per share Has posted very strong financials. Stock is currently underperforming. Company has received 2 major orders, one in Thailand and another by PGCIL in

March. In February, a mishap at one of its construction site lead to 3 deaths, followed by a Court Case and a Criminal enquiry .

Stocks tanked to 2 year low. However, the case is in cold storage now. Company is on a recovery track.

Transformers and Rectifiers @ 341.10 per share The company has posted a 73.8% increase in total income to Rs.248 crore compared with Rs.163.4 crore in the

corresponding period of the year ago. Can emerge as a small cap wonder. Transformer industry has posted robust profits this years, following committed governmental expansion plans.

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