The Electric Utilities Index declined 4.4% in March, almost the same as the RTS Index (-4.1%). Electricity Grids were more resilient, losing 2.0%, while the Power Generation Index dropped 3.3%.
Among liquid names, the best performer was MRSK Holding (+11.1% MoM). FSK lost 8.7%. The tariffs talk continues to dominate grids with our key story being the trading implications for both FEES and MRKH. IRAO continues moving south, with another 13.2% drop in March, but the FY11 results (due in April) could stop the fall. RusHydro lost 9.1% on the back of weak cost control in FY11 RAS, risks of BEMO delay and lower water flows. Among second tiers the leaders were MRSK Centre (+13.7%), Volga (+12.7%), E.On Russia (+9.2%) and OGK 5 (+7.8%).
Electricity demand in March printed 1.3% YoY growth. The average temperature remained unchanged and electricity demand was driven purely by the economy expanding. For 1Q12 demand added 1.7% YoY, which is 0.3pp above our 1.4% FY forecast.
Free electricity prices added 23.4% YoY in Siberia but dropped 7.6% YoY in Europe in March, but remained near the absolute levels of December 2011. It will be important to watch the further dynamics. Tariff decisions for MRSKs have been delayed by the regulator to June. FSK has a chance to get its tariff earlier. In March, Vedomosti reported that FSK’s tariff could increase 10-19% vs. 15-20% expected by the Street. Since then, the stock has dropped 12.7%. Our calculation show that with this move FSK has almost priced in an 11% tariff increase. We calculate that if 11% is approved, there is only 5-7% downside left. We believe that any possible weakness after the tariff decision would be a buying opportunity as the fundamental basis for FEES is intact. Separately, a lower tariff for FSK is good for MRSKs (MRKH added 11% in March). Trading at 9.0x 2012-13 P/E vs. 11.6x for EM and 13.6x for FSK, MRKH still has 30-50% upside potential.