Till actual implementation of reforms for the sector, the recent rise in share prices seems unlikely to sustain.
Power stocks were back in action on the bourses, on hopes that the Prime Minister's meeting with private power company heads on Wednesday would yield immediate results. Since the news came around the end of last week, the stocks of power firms have jumped as much as 20 per cent. However, analysts do not believe the sector's woes can be sorted easily, and think Wednesday's meeting will only give direction, rather than any action. "It is to judge on what issues support can or cannot be expected from the government to plan projects for future," says one.
Till the time issues are resolved, the outlook continues to be negative for the sector and analysts advise investors to stay away. Says Manish Sonthalia, vice-president and fund manager, Motilal Oswal Asset Management, "We are negative on the generation companies. There is no point investing in these currently."
| HIGH ON HOPES | ||||
| 17-Jan Price (Rs) | P/B (x) | Stock return (%) | ||
| 1-week | 1-year | |||
| Adani Power | 83.00 | 2.1 | 20.0 | -32.5 |
| Lanco Infratech | 15.00 | 0.7 | 18.0 | -73.0 |
| Jaiprakash Power | 41.00 | 1.8 | 18.0 | -17.6 |
| Reliance Power | 89.00 | 1.4 | 11.0 | -36.0 |
| CESC | 233.50 | 0.6 | 9.2 | -30.0 |
| JSW Energy | 44.35 | 1.1 | 6.9 | -49.0 |
| Jindal Steel & Power | 511.00 | 2.2 | 2.4 | -24.0 |
| GVK Power | 14.10 | 0.6 | 0.4 | -60.6 |
| Tata Power | 97.00 | 1.8 | 3.0 | -28.0 |
| NTPC | 167.25 | 1.7 | 5.8 | -11.0 |
| Neyvelli Lignite | 83.00 | 1.1 | 2.8 | -31.0 |
| P/B is price-to-book value and is based on estimated FY13 book value Source: Stock exchanges, Analysts reports | ||||
New private players, especially those with high leverage and large capacities under construction whose progress is stuck for different reasons, are likely to be the most affected. Companies with a regulated business model (or integrated operations with captive mines), including NTPC, Tata Power, CESC or Jindal Steel & Power, are better placed and figure among analysts’ preferred picks.
Concerns
The biggest concern for the sector is availability of fuel (both coal and gas), followed by rising cost of fuel, poor financial health of state electricity boards (SEBs, affecting receivables) and banks' reluctance to lend. Coal India, the world's largest mining company, and meeting 80 per cent of India's requirements, is falling behind own production targets. In fact, the current shortage of 100 million tonnes is expected to double in the next three years.
The cost of imported coal has also gone up. Changes in Indonesian law (September 2011) have made its export price linked to international benchmarks. This has made upcoming projects dependent on coal from here unviable, such as Tata Power's Mundra (Gujarat) and Reliance Power's Krishnapatnam (Andhra Pradesh).
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Even existing gas-based projects, currently having a cumulative capacity of 16,600 Mw, are running at sub-optimal levels (average 55 per cent plant load factor) due to lack of sufficient production. There are 8,200 Mw of projects coming up in the next 18 months, of which half are expected to be commissioned by March but await gas allocation.
Apart from companies facing fuel shortage, those facing delayed payment from SEBs are also finding it difficult to raise funds from banks.
Possible solutions
In the immediate term, allowing companies having captive coal mines to sell excess coal can help. Pooling of gas prices (blending with imported LNG) will help narrow the shortage. For the long term, Sonthalia feels the government needs to fast-track environmental clearance. If that happens, all other things will follow.
Analysts unanimously feel the only solution for the rising cost of imported coal is to allow companies to raise rates, since many projects based on imported coal have now turned unviable. As for SEBs, apart from revamping these, raising rates is also a key solution for improving their health. Says Ajay Parmar, co-head of the investment banking division at Emkay Global, "We (most consumers) are still not paying actual prices and it is, to some extent, subsidised."
Analysts' picks
NTPC: The company is the top pick in the utilities space due to its regulated business model, least fuel availability risk and least receivables risk (being the cheapest source of electricity for SEBs).
Tata Power: While valuations have turned attractive after the stock's correction, analysts feel most of the negatives (mainly estimated losses in the Mundra UMPP due to higher imported coal prices, slow ramp-up in captive mines and delayed commissioning of the 1,100 Mw Maithon project) are priced in.
CESC: The company is an integrated player and involved in distribution of power generated from its own plant directly to retail customers (Kolkata and Howrah in West Bengal). Also, the West Bengal Electricity Regulatory Commission (WBERC) is expected to approve its rates' petition for the three years up to 2013-14 within a couple of months. The improving performance of its retail business (Spencer's is its 95 per cent subsidiary) and prospects of inducting a foreign partner in the long term are other positives. Meanwhile, CESC is trying to mitigate fuel risk by acquiring mines abroad (raised stake to 12 per cent in Australia-based Resource Generation, which is developing mines in South Africa).
Jindal Steel and Power: The power business (60 per cent of sum-of-the-parts valuation) is expected to be the future growth driver, given the expected addition of 1,350 Mw (in FY13) and 4,380 Mw (long term) to its current 1,000 Mw operational capacity (entirely on merchant power). The company is secured in terms of fuel risk due to captive coal mines (2.56 billion tonnes of reserves) and expected commissioning at Utkal (Anugul district in Orrisa), South Africa (700 million tonnes) and Indonesia (200 mt) by March 2012. Further, it has received new coal exploration licences in Australia and is looking for acquisition of mines in Australia, Indonesia, South American and African countries.