Few takers despite heavy slump in shares; observers say govt help required.
The shares of private power producers, which have slumped 40 per cent this year, are unlikely to find favour among investors despite cheaper valuations, till the government intervenes to solve the sector’s problems.
Factors such as coal shortage, problems in acquiring land, deteriorating financial health of state electricity boards (SEBs), and higher fuel cost have sapped investors’ appetite for these shares, resulting in their sharp underperformance vis-à-vis the broader market.
| LOW ON ENERGY BSE price (in Rs) | |||
| Nov 17, 2011 | % change | ||
| YTD* | From issue price | ||
| GVK Power & Infra | 10.61 | -73.90 | -65.77 |
| Indiabull Power | 9.99 | -65.67 | -77.80 |
| JSW Energy | 45.80 | -53.99 | -54.20 |
| Reliance Power | 90.40 | -42.82 | -61.17 |
| Adani Power | 75.70 | -41.81 | -24.30 |
| Sensex | 16461.71 | -19.73 | - |
| BSE Power Index | 1988.09 | -33.48 | - |
| * Year to date Data compiled by BS Research Bureau | |||
The shares of Adani Power, which had raised a little over Rs 3,000 crore through its initial share sale offer in August 2009, have declined 41.8 per cent in this year. In comparison, the BSE Power Index has declined 33.5 per cent during the same period, while the Sensex lost 19.7 per cent, data compiled by the BS Research Bureau showed. Others like GVK Power & Infrastructure, Indiabulls Power, JSW Energy and Reliance Power have fared even worse during the period. All these stocks are trading way below their issue prices.
The implementation risk for power producers has gone up appreciably due to coal shortage and problems in acquiring land, experts say.
"The whole power sector is in an abyss. Quite a lot of these companies are unviable at this stage,” said U R Bhat, managing director at Dalton Capital Advisors (India). “Their power purchase agreements with SEBs have become unviable. It's uneconomical to sell power at that price.”
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Bhat believes there is a case for a one-time dues settlement for SEBs and an increase in retail power prices. “Investing in shares of power producers at this stage is a call on the government. Ten years ago, the power sector started doing well after the government implemented a one-time settlement with the SEBs,” he said.
According to rating agency Crisil, the structural threat of fuel unavailability and pricing can impair the viability of almost a third of the 56,000 Mw of thermal generation capacity under implementation. It estimates that rates need to be raised by an average of 50 per cent for state utilities to break even and to eliminate a need for subsidy.
“The entire capital expenditure of Rs 1,00,000 crore per year for power generation has come to a standstill,” said an investment banker, who spoke on condition of anonymity.
No wonder, valuations of power producers’ stocks have plummeted on bourses, but investors still prefer to stay away. For example, Adani Power shares were quoting at 36 times their estimated earnings for 2010-11 in December last year. At on Thursday’s close of Rs 75.70, the stock is now available at 11.25 times its estimated earnings for 2011-12.
“The dynamics of the power industry have changed. Till the time proper reform measures are not in place and the present problems of the industry are not addressed, it is difficult to state when power stocks will bottom out,” said Mehraboon Irani, principal & head, private client group, Nirmal Bang Securities. “While there may be a counter-argument that all the negatives are reflected in the present share prices, you don’t buy into stocks just because they have come down. You buy into them because they have a potential to go up.”