In this briefing:
- India: New Tariff Regulation Is Temporary Relief For NTPC Ltd (NTPC IN) and Power Grid (PWGR IN)
- India – NPL Sale Is Not a Panacea
- India: Thermal Coal Imports Are Rising, What Does It Mean For End User Industries and the Economy?
- India Banks – HDFC Bank Subsidiary Stalled Profit
- Metropolis Healthcare Pre-IPO Quick Take – Steady Performance but Growth Lagged Network Expansion
1. India: New Tariff Regulation Is Temporary Relief For NTPC Ltd (NTPC IN) and Power Grid (PWGR IN)
This is something you really don’t see often, a sharp and positive stock price movement in Govt owned Indian power utilities. But after the latest draft regulation on the tariff norms for 2019-24 from CERC (the Central Electricity Regulatory Commission, which is the highest regulatory body for power sector in India) was released on 14th of December, both NTPC Ltd (NTPC IN) and Power Grid Corporation Of India (PWGR IN) have done well in absolute terms and also outperformed the broader markets. After CERC suggested continuation of the 15.5% regulated return on equity (RoE) for the power generation and transmission companies, this was seen as a positive regulatory development and helped these stocks.
However, investors should also look at the risks before getting too optimistic on Govt owned Regulated Power Utilities, a) these are not final norms and CERC has invited comments from the stakeholders and Regulator may still tweak the tariff norms for period starting 1st April 2019 depending on feedback and inputs from DISCOMs and consumer groups, b) Usually, the political rivalry between Centre and States doesn’t affect the PSUs but as some of recent developments such as Odisha where the state blamed Centre for increased tariff burden suggest, this is changing and could be damaging for future long term contracts of NTPC Ltd (NTPC IN) and Power Grid Corporation Of India Limited (PWGR IN).
There are question marks on future growth for both these companies. While NTPC Ltd (NTPC IN) will have to compete with renewable sources, there is a risk that capex growth will slow down for Power Grid Corporation Of India Limited (PWGR IN) as well. While latest draft regulation has come as positive, we don’t expect sustained stock price outperformance from NTPC Ltd (NTPC IN) and Power Grid Corporation Of India Limited (PWGR IN) as there are structural challenges for them and a Govt ownership and its impact on strategic decision making continues to remain an overhang.
2. India – NPL Sale Is Not a Panacea
Selling bad loans to the government, and asset management company or to a distressed loan buyer is not necessarily a remedy to the crisis for India’s banks. This is because their non-performing loan (NPL) levels are high compared with their buffer to absorb losses, e.g loan loss reserves and capital. Where it is rare to know about the selling price of NPLs in any market, there is news out today of a large NPL sale at 24 cents on the dollar. The market is not India, rather Indonesia, but this only raises concerns further: it is more likely that an NPL divestiture in India yields a worse price than in Indonesia. This is due to wildly different NPL trends and NPL levels in each country.
3. India: Thermal Coal Imports Are Rising, What Does It Mean For End User Industries and the Economy?
India’s coal imports have risen 10% in the first eight months of FY19 and this year is likely to be the repeat of previous financial year when after falling for two years, India’s coal import had grown 8.1% yoy. After the NDA took over in May 2014, Indian Govt has spoken about eliminating coal imports altogether. However, there are serious problems with domestic production, logistics issues and poor track record of coal sector PSUs. Coal India Ltd (COAL IN) contributes more than 80% of India’s domestic coal output and FY19 has been a little better in comparison of previous years so far for the company. But, its performance has dipped over previous few months and it is very likely that coal imports will grow significantly again in FY19.
The higher coal imports is relevant for several sectors and many companies. The major implications are, 1) This is bad news for Coal India Ltd (COAL IN) and the company’s ability to increase supplies in the more profitable e-auction segment, 2) Increase in cost of power generation affects specific GENCOs and later, the entire power sector because cost of power procurement goes up for DISCOMs, 3) with increase in electricity prices, inflation may also increase and there is negative impact on balance between imports and exports, 4) it is also good news for renewables as they get more competitive on cost which makes them more attractive, 5) this is bad for entire value chain of coal based power plants which includes companies such as Bharat Heavy Electricals (BHEL IN).
4. India Banks – HDFC Bank Subsidiary Stalled Profit
When most analyze HDFC Bank (HDFCB IN), there is little emphasis on its non-banking finance company (NBFC) subsidiary, HDB Financial Services (HDBFS). Perhaps in the current environment, this is more important than ever. At the same time, where HDFC Bank’s subsidiary has had significant growth in recent periods, where this begins to change, it has important implications. Most do not believe HDFC Bank can ever show poor earnings growth, let alone high bad loans and credit costs. We disagree. As India’s second largest bank, it is beholden to the macro economic overlay; even if delayed or not clearly visible. We wonder if HDBFS’s latest figures showing just 1% gross profit growth, is one sign of this?
5. Metropolis Healthcare Pre-IPO Quick Take – Steady Performance but Growth Lagged Network Expansion
Metropolis Health Services Limited (MHL IN) (MHL) plans to raise US$100m+ in its Indian IPO. MHL is one of the largest diagnostic chains in the country. Carlyle invested in the company in 2015.
MHL has registered steady growth and margins over the past few years. It has also aggressively expanded its network over the past few years, although revenue growth hasn’t matched the network expansion.
MHL’s recent financial performance has been in-line with its listed peers, Dr Lal Pathlabs (DLPL IN) and Thyrocare Technologies (THYROCAR IN), while the company continues to lead its two listed peers in terms of revenue generated per test.
