Monday, September 17, 2012

(BN) Blackouts Spur $18 Billion Power Grid Upgrade: Corporate India

Power Grid Corp. of India Ltd., the nation's largest electricity transmission company, may exceed a 1 trillion rupee ($18 billion) spending plan to upgrade its network and avoid a repeat of the world's biggest blackout.

Revenue of the state-owned company, which is doubling expenditure in the five years through March, 2017, may rise fourfold in the period following completion of transmission projects, R.P. Sasmal, director of operations said in an interview. The grid aims to boost its market share to 70 percent from 50 percent as the company increases spending at a rate that will dwarf its competition, he said.

The utility, based in Gurgaon near New Delhi, is taking steps to prevent another grid failure like those on July 30 and 31 that left a region home to more than half of the country's 1.2 billion without electricity, halting transport services and forcing businesses to rely on generators. Power Grid reported record sales and earnings in the financial year through March 31, while shares have climbed 20 percent in 2012, almost matching gains in the benchmark Sensitive Index. (SENSEX)

"Making sure a collapse doesn't happen again is our top priority," Power Grid Chairman R.N. Nayak said in an interview separately on Sept. 14. "We may end up crossing that 1 trillion-rupee spending mark to strengthen and stabilize the gaps exposed by the blackouts."

Farmer Dependence

The company's network failed because of a mismanagement of power sales and its emergency backup system, according to a government inquiry. At the time of the blackout, India was enduring its driest monsoon season since 2009, forcing farmers in northern India to increase their dependence on electrified irrigation pumps.

When a link in north India failed while transferring about 4,000 megawatts from India's western grid to its northern network to meet demand, Power Grid (PWGR) was in the midst of scheduled maintenance of its backup lines, triggering the region-wide blackout, according to the government report.

The company's most urgent project aims to connect two portions of India's network: the northern grid which accounts for 75 percent of the country's power capacity, to its system in southern India. Linking the two will allow the south to transfer surplus power to supply deficient states in the north, where the grid collapse occurred.

"We have stepped up our efforts to increase connectivity," Sasmal said. "What some companies plan to spend in five years, we are spending that in one month."

Bond Sale

The company has already approved projects worth 800 billion rupees and plans to raise at least 700 billion rupees in debt over the next five years, Sasmal said. Of that, about a third has already come from local and foreign lenders and another 40 billion rupees will be raised through a bond sale later this month, he said.

While Power Grid hopes to shed the lingering effects of the grid failure, it will continue to be dependent on India's generators for business. Prime Minister Manmohan Singh is seeking investment in the power industry as he targets an additional 76,000 megawatts by 2017.

Should producers fail to meet the goal, as has been the case for the last 61 years, Power Grid could fall short of its investment target, said analyst Abhishek Patel, with Mumbai- based ITI Securities Ltd.

Facing Headwind

"Power generators are facing a lot of headwinds, from lack of coal supply both locally and from abroad, financing challenges and land clearance delays," Patel said in an interview. "Assuming generators fall short of their capacity target by about 20 gigawatts, we're estimating that Power Grid will fail to reach its spending target."

India has missed every annual target to add electricity production capacity since 1951, resulting in a peak demand deficit of nearly 10 percent. Power cuts are common across swathes of India as the country battles outages that the government says shave about 1.2 percentage points off annual economic growth.

India plans to spend 13.73 trillion rupees to expand and upgrade its power systems in the next five years, most of which will be led by generators including state-owned NTPC Ltd. (NTPC), India's largest producer, Tata Power Ltd., Reliance Power Ltd. (RPWR), Adani Power Ltd. (ADANI) and Lanco Infratech Ltd. (LANCI)

The nation will depend almost entirely on Power Grid to run power lines from their plants to local distributors. The transmission industry needs to spend 1.25 trillion rupees to match the increase in generation, said Subhranshu Patnaik, a Gurgaon-based senior director at Deloitte Touche Tohmatsu India Pvt.

'Not Rocket Science'

"It's not rocket science," Patnaik said. "Power Grid's ability to deliver has never been in doubt; they are far more efficient and face much less competition than generators like NTPC. Some states are giving up on adding their own power lines, leaving almost the entire business to Power Grid."

Power Grid fell 2 percent to 117.6 rupees at the close in Mumbai. The BSE India Power Index (BSEPOWR) rose 0.4 percent.

Sales at the company have more than doubled from four years ago to 100.4 billion rupees in the 12 months ended March 31, with an annual average growth rate of about 23 percent, according to data compiled by Bloomberg. Net income more than doubled as well to 32.5 billion rupees during the same period.

Forty of the 46 analysts covering the company recommend buying the stock, with four rating it a hold and two a sell, data compiled by Bloomberg show.

The company has undertaken development of 11 high capacity transmission corridors to connect power from various projects developed by India's electricity producers to the network. Should those utilities succeed in adding capacity, Sasmal estimates the company's annual revenue will rise to 460 billion rupees in the 12 months ending March 31, 2017.

"We expect all our projects to be implemented on schedule, first of which will be up and running next year," said Sasmal. "The government is backing all of them as it's critical for achieving self-sufficiency in power."

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