10 stocks to be powered by UDAY

With financial burden reducing for SEBs, companies like KEC, Kalpataru, CESC, PFC, REC stand to gain

In November 2015, when the government announced the Ujwal DISCOM Assurance Yojana (UDAY) programme to turn around electricity distribution companies (discoms), there was little hope that it would alleviate the debt and operational burdens of the state electricity boards (SEBs). But, in 16 months, UDAY is emerging as a hero for the power sector, with many companies operating in this space clocking/expected to report good earnings growth. While Power Grid and NTPC may be the biggest beneficiaries of these efforts, others such as Siemens, ABB, Kalpataru, KEC, JSW Energy, CESC and even financiers such as Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) stand to gain. Here’s why: 

ABB India

ABB has started the year with an order backlog of Rs 11,800 crore, which gives it a year’s earnings visibility. A presence in the railways and the transmission and distribution (T&D) sectors, both of which are witnessing a revival in orders, is another positive. Technology support from its Swedish parent helps in aggressively bidding for projects. While valuations are expensive, ABB India offers steady growth for long-term investors. 

CESC

Being a relatively well-placed independent power producer, CESC enjoys strong earnings visibility. Improvement in the Chandrapur (Maharashtra) project, which would turn profitable FY19, should further enhance prospects. The sore point is CESC’s investments in non-core assets such as real estate and retail. Affirmative action to divest interest from these businesses should propel the stock.

GE T&D

After four consecutive quarters of a steep net profit decline, GE T&D showed promise in the December quarter. While pricing pressure or competition hasn’t ebbed, a recovery in execution should help revenues stabilise in FY18. The order book at Rs 8,150 crore supports the same. Exposure to solar power is also positive. 

Kalpataru Power 

Order visibility from SEBs and railways (estimated at Rs 28,600 crore) offers earnings visibility for FY18; the standalone order book stood at Rs 8,300 crore, while subsidiary JMC Projects was Rs 6,800 crore at the end of the December quarter. This could also offset likely losses from Power Grid’s orders. Ramping up EPC (engineering, procurement and construction) operations will help cut its dependence on debt.

KEC International

In the past two years, KEC has benefited from international orders. However, from FY18, analysts believe the domestic business should reflect more on its financials. SEBs and railway orders should keep KEC busy. Efforts are on to reduce its working capital requirements, which should help reducing interest expenses from FY18.

PFC and REC

With about 70 per cent of the discom debt being restructured, UDAY has helped PFC and REC from recognising losses on loans to SEBs and discoms. The loan book continues to grow for both the financiers, thanks to demand from SEBs in West Bengal and Tamil Nadu. Reduction in AT&C  (aggregate technical and commercial) losses, the narrowing gap between costs and revenues, and interest cost savings will help resolve and upgrade a larger part of SEBs' stressed loan pool. Increasing opportunities in the renewables space also bode well for the companies. 

Siemens

A strong market share in high-technology solutions for power T&D, metro rails, railway signalling and smart cities makes Siemens well-positioned to benefit from government tenders in power and infrastructure projects. Siemens India is a key partner in its parent company’s plans to increase its global footprints. This should aid exports to Asia and North Africa. 

Skipper

The track-record of minimum execution slippages in the past years positions Skipper favourably to gain from Power Grid and SEBs contracts. While its polymer products business is under pressure, a revival is expected in FY18. Capital expansion at its Guwahati facility for towers and distribution poles should reflect positively from early FY18. 

Techno Electric

With a presence in power T&D and renewable energy, Techno Electric is a comprehensive play on power projects from across all spectrums. Power Grid and NTPC account for 87 per cent of its order book, thus eliminating the risk of order execution. The order book at Rs 2,300 crore provides earnings visibility of at least two years.