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HSBC Underweight on Indian Utilities

March 17, 2008

In a report by HSBC released just a while ago, they have reiterated their UNDERWEIGHT rating on Indian utilities. The report says, there is downside from current levels even after the recent correction. Execution delays, non-availability of fuel linkages and power evacuation yet to be discounted by the market.

NTPC:
Given NTPC’s project execution skills and operational efficiency, we expect the company to earn more than the guaranteed returns. HSBC forecast earnings to increase at a CAGR of 19% over FY07-12 as its regulated power should grow exponentially in the next 5 years. Based on a terminal growth rate of 5.0% and nominal capital expenditure in the terminal year, HSBC’s DCF valuation of the company is INR186 per share.

Tata Power:
Tata Power is planning to expand capacity to 12.8GW by FY14. The company has indicated 2,700MW group captive capacity to be developed for Tata Steel by its subsidiary Integrated Energy Ltd, where it holds a 74% stake. HSBC maintains target price at INR1198 (INR1190), which is the average of our two valuation methods: a DCF analysis of INR1559 (using a cost of equity of 12.7%, beta of 0.91 and a terminal growth rate of 5.0%) and a sum-of-the-parts valuation of INR837. Retain UNDERWEIGHT rating.

Reliance Energy:
Target price at INR639 per share, which is the average of our two valuation methods: a DCF analysis of INR653 (using a cost of equity of 13.1%, a terminal growth rate of 5.0%, and a beta of 0.95) and a sum-of-the-parts valuation of INR625. Target is equivalent to 14.3x FY08e earnings. Retain UNDERWEIGHT rating.

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