Power companies glow on brighter outlook

Stocks of several power companies and suppliers have shot up sharply over the last few months, in some cases as high as 150 per cent.

What explains this exuberance when there's no change in the fundamentals? Are the valuations justified?

Worldwide, utilities are amongst the least fancied stocks by investors. In India, the power market has been controlled by state electricity boards and tariffs are driven by political rather than economic considerations.

Power projects always offered good returns in an industry in which demand far outstrips supply. What's different now is the scale of projects on offer for private sector investment and a critical reorientation of the nature of the market .

Let's look at the investment first. With a demand-supply gap of 12 per cent, the country has set an ambitious capacity addition target of 78,577 Mw of power-generating capacity in the next five years, a significant proportion of it by the private sector.
 

POWERFUL SURGE
	Price on BSE (in Rs)			Price-to-earnings multiple
	Aug 7, '07	Dec 18, '07	% change	Aug 7, '07	Dec 18, '07
JP Hydro-Power	40.15	128.30	219.55	9.08	27.58
Lanco Infratech	255.65	783.75	206.57	23.30	71.44
Reliance Energy	764.70	1808.05	136.44	21.21	46.63
Suryachakra Power	19.95	40.85	104.76	51.31	105.07
Tata Power	690.10	1255.09	81.87	19.97	33.88
PTC India	82.30	141.44	71.86	35.32	56.27
GVK Power	532.70	764.15	43.45	44.99	64.54
NTPC	166.70	232.40	39.41	17.89	23.56
GMR Infrastructure#	167.71	232.65	38.72	136.35	189.15
Power Grid Corporation	100.65*	136.94	36.06	71.18	96.86
CESC	454.85	594.50	30.70	20.27	24.36
*Price on October 5, 2007, the day it listed #Face Value: Rs 2, rest Rs 10

Generation will attract the bulk of the investments (Rs 5,00,000 crore) in the next five years. The transmission and distribution sectors, which have been ignored in the past, will also see investments of Rs 140,000 crore and Rs 170,000 crore, respectively.

Reliance Energy Ltd (REL), whose stock has been a star performer, plans to invest Rs 60,000 crore to take its capacity to 15,000 Mw in the next five years, Tata Power plans to add 10,000 Mw during the same period, including the ultra-mega power project (UMPP) at Mundra.

REL, in fact, has bagged two of the government's 4,000 MW ultra-mega power projects (UMPPs) in Sasan, Madhya Pradesh and Krishanpatnam in Andhra Pradesh.

''The private sector feels there's a good chance of getting good returns by investing in power,'' said R Chandak, managing director of KEC International, which supplies transmission towers to utilities.

''Investors realise that companies are in for a period of high growth. Companies that were generating 2,000 Mw will now be doing projects of 4,000 Mw each. This will create top-line growth,'' said Adi Engineer, an industry expert who also serves on the board of Tata Power.

These projects or UMPPs can also provide stable profits for 25 years (power projects are permitted assured returns of 14 per cent on equity under the government's tariff policy).

''A UMPP of 4,000 Mw can generate a net profit of Rs 560 crore to Rs 800 crore for 25 years, based on the return you target. How many businesses can provide you that kind of profits without vagaries of market fluctuations for 25 years at a stretch,'' said Venkatesh Babu, managing director, Lanco Infratech

UMPPs and other power projects that are granted coal linkages are in a particularly strong position.

A total of 53,000 Mw of capacity will come up on coal in the eleventh plan, and all these projects will be provided coal linkages, according to a power ministry official.

The Centre's UMPPs, some of which come with coal-linkages, initially excited bidders because they don't have to run from pillar to post to get approvals.

The Centre created a shell company that secured all the approvals.

This in itself is considered a huge upside. As Dhaul puts it, "Investors are no longer looking at dividends but at business valuations or how difficult it would be for someone to rebuild this business today.'