Modi’s Energy Pledge Tested as Back-Up Power Use Seen Rising

To see the task new Indian Prime Minister Narendra Modi faces to fix the country’s electricity blackouts, look no further than the soaring share prices of companies that make back-up power generators.

Kirloskar Oil Engines Ltd. is up 53 percent this year, Greaves Cotton Ltd. 45 percent and Cummins India Ltd. 35 percent, more than the benchmark S&P BSE Sensex’s 19 percent increase. Investors are betting Modi’s push to revive economic growth from close to a decade low will stoke power shortages, spurring demand for generators even as he vows reliable electricity supplies by 2022.

“Modi’s promise of round-the-clock electricity supply is doable, but is extremely difficult,” said D.K. Aggarwal, New Delhi-based chairman of SMC Investments & Advisors Ltd., which manages more than $100 million of Indian shares. “Demand for back-up power will remain in the foreseeable future.”

Modi’s agenda includes speeding up about $255 billion of stalled investments after his Bharatiya Janata Party swept to India’s first single-party majority since 1984. A pledge to spur power output may be harder to implement as regulators force electricity retailers to sell below cost to ensure affordability, limiting their capacity to pay for more supplies.

India’s market for inverters and diesel-fired generators will grow almost 20 percent to $2 billion by 2017, according to Amol Kotwal, director for the energy and power systems practice at consultancy Frost & Sullivan in Bangalore. The current size of $1.7 billion compares with China’s $4.5 billion, $1.2 billion in Brazil and Indonesia’s $900 million, Kotwal estimates.


A heatwave in north India this month underscored the lack of enough supply. In Uttar Pradesh state, officials were held hostage to protest power outages as temperatures neared 50 degrees Celsius (122 degrees Fahrenheit), the Times of India reported.

In New Delhi, local officials have cut off electricity to shopping malls after 10 p.m. and asked colleges and government offices to turn off air conditioners for an hour during the day.

India’s peak power shortfall in the year ended March 31 was 6,103 megawatts, or 4.5 percent of the requirement of 135,918 megawatts, the Central Electricity Authority estimates, down from 9 percent in the prior 12 months.

The deficit will widen in the short term as investments pick up after last month’s general election led to a stable government, according to Sameer Gupta, the managing director of Jakson Group, a manufacturer of generators based near New Delhi.

Reviving Growth

Morgan Stanley, Citigroup Inc. and Nomura Holdings Inc. raised their growth forecasts for India after Modi’s win. Gross domestic product will rise 6.5 percent in the year through March 2016, Morgan Stanley predicts, from 4.7 percent in 2013-2014.

Diesel-fired back up costs about 16 rupees (27 cents) per unit, more than double an average 7.5 rupees per unit from utilities, Jakson estimates. Mumbai-based Greaves Cotton and Jakson expect demand for generators to climb as much as 10 percent annually.

Still, much depends on the pace of the expected increase in spending on such things as railways, roads and ports, according to Bhargav Buddhadev, Mumbai-based analyst at Ambit Capital Pvt.

Officials will only clean up “the mess” in infrastructure in the 12 months through March 2015, with a recovery in capital expenditure coming the year after, he said.

Earnings Improvement?

Profit at Greaves Cotton rose 34 percent to 515.6 million rupees in January through March. Pune-based Kirloskar’s net income fell 16 percent to 496.3 million rupees. Profit at Cummins India, also based in Pune, slid 25 percent to 1.42 billion rupees.

Earnings will pick up next fiscal year as investment climbs, stoking the peak power deficit as well as demand for generators at construction sites, said Kenin Jain, equity sales head at Emkay Global Financial Services Ltd. in Mumbai.

Kirloskar shares fell 1.4 percent at the close in Mumbai today, while Greaves Cotton dropped 0.9 percent and Cummins India slid 2 percent. The Sensex, boosted this year by bets Modi will revitalize the economy, decreased 0.2 percent.

Modi burnished his reputation for economic management as chief minister of Gujarat state, where he implemented policies that provide uninterrupted power supplies.

His agenda as India’s leader includes overhauling the coal industry, expanding gas grids to households and industries, and enhancing solar and nuclear electricity output. The goal is unbroken power for every household within a decade.

$17 Billion

Among the obstacles are power theft and dissipation that lead to $17 billion in lost revenue each year at electricity retailers, according to calculations by Bloomberg News.

Distributors owed 141 billion rupees to state-run generators as of April 30, the Power Ministry estimates.

The memory of the partial collapse in India’s power grid in 2012 also lingers. That failure left an area inhabited by almost half the country’s 1.2 billion people without electricity.

India’s generation capacity needs to quadruple by 2030 for the government to eliminate outages, as per capita power consumption will jump to 2,100 kilowatt-hour from 684 kilowatt-hour in 2011, said Ashish Sethia, head of Asia-Pacific gas and power analysis at Bloomberg New Energy Finance.

That needs investment of more than $800 billion -- equivalent to about 43 percent of India’s gross domestic product of $1.86 trillion, he said. Even after the projected increase in consumption, Indian demand will be lower than 3,298 kilowatt-hour in China in 2011 and 13,246 kilowatt-hour in the U.S.

India’s new administration will have to make substantial progress against outages before companies think again about investing in back-up power, said Hariprasad Hegde, global operations head at Bangalore-based outsourcer Wipro Ltd., whose diesel-fired generators provide a 160-megawatt safety net.

“Unless we reach levels of zero interruption and assurance levels are extremely high, the backup thing won’t change,” he said.

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