Power sector reforms draw foreign funds

The restructuring of the power sector has attracted foreign institutional investors (FIIs) like never before.

FIIs have aggressively mopped up shares of majors such as Reliance Energy (formerly BSES) and Tata Power in the last three months.

According to sector analysts, the opening of the sector to private players and the restructuring have thrown up significant potential benefits to private players.

As a result, domestic institutions and FIIs have been flocking to these counters.

According to Urmik Chhaya, analyst at Karvy Consultants Ltd, "The power sector is looking up primarily because of the reforms initiative. The one-time settlement scheme for state electricity board dues, APDRP, the Electricity Act and the success of distribution reforms in Delhi have led to more and more states opting for restructuring."

During the quarter ended March 31, 2004, FIIs have increased their holding in power major Reliance Energy to 12.98 per cent, up 7.01 per cent compared with 5.97 per cent in the December ended quarter.

Similarly, in Tata Power, FII holding has gone up to 11.52 per cent compared with 9.95 per cent in the previous quarter.

According to Bombay Stock Exchange information on shareholding patterns, Janus Worldwide Fund has picked up 2 per cent equity in Tata Power during the quarter ended March 31, 2004.

On a year-on-year basis, FII holding in Reliance Energy and Tata Power has risen by 12.02 per cent and 6.63 per cent, respectively.

A research report issued by a domestic brokerage firm says the growth potential for most power companies is not yet fully discounted, and with the balance of power shifting to distributors with the formation of a national grid, power generation companies would cease to enjoy the locational advantage that they currently do in an otherwise homogenous market.

However, multiple licenses within a circle or open access to distribution lines would reduce effective returns in distribution.

Among the power sector stocks, Reliance Energy has been one of the biggest gainers on the Bombay Stock Exchange.

The share has appreciated 260 per cent from Rs 214.40 on March 13, 2003, to today's close of Rs 770.95.

Even the newly listed Power Trading Corporation of India, which debuted with a 100 per cent premium over the issue price, is trading at Rs 44.20, up nearly 176 per cent against its issue price of Rs 16.

According to an analyst with Fortis Securities, the volume growth will boost PTC's earnings.

"Currently, power traded accounts for nearly 2.5 per cent of the total power generated in the country. We expect the share of power traded to reach the international average of 10 per cent by 2010. Also, the 10th Plan envisages a capacity addition of 1 lakh mw by 2010. As a result, we expect a CAGR volume of 61 per cent, up to FY06, from 4,178 million units in FY03 to 17,300 million units. This would ensure buoyant earnings growth."