Power Grid, NTPC stand out among power stocks

Analysts cautious on sector, but prefer these two on earnings growth, reasonable valuations

Just as the S&P BSE Sensex touched its 2016 high on Thursday, stocks of Power Grid Corporation of India Ltd (PGCIL) and NTPC, too, found new yearly highs.

Foreign portfolio investors, who were paring stakes in these two counters until December, have once again turned buyers; June quarter data are awaited. With this, these two stocks are increasingly reckoned as safe bets in the power sector.

For PGCIL, keeping capitalisation (commissioning new capacities) target up despite poor demand outlook adds strength to its investment conviction. With a record capitalisation of Rs 31,788 crore in FY16 (46 per cent higher year-on-year), PGCIL is confident of keeping up its average rate (Rs 31,000 crore) in FY17.

In fact, it is also on track to execute its Rs 1,10,000-crore capital expenditure (capex) plan by FY17, as it has already achieved 80 per cent completion. Analysts at Emkay Financial Services expect PGCIL to be an outperformer, on strong capitalisation-led earnings growth of 22 per cent.

Return on equity (ROE) is pegged at 16 per cent yearly over the next three years. While there is a possibility of increase in public float on account of likely ‘offer for sale’ by the government, analysts feel it is unlikely to be an overhang in the long term. Also, with telecom and consultancy verticals showing signs of operational pick-up, their contribution to revenues could boost valuations, which are at pretty reasonable levels currently (price to book value of 1.6; price-to-earnings of 11 times the FY17 estimates).

As for NTPC, the loss of independent power producers (IPPs) will be its likely gain. With state boards increasingly looking at cost-cutting, IPPs dependent on imported coal might be in for tough days. With higher production from Coal India, the focus is now on replacing imported coal with domestic coal to reduce generation cost, a likely negative for private companies relying on imported coal.

Edelweiss notes this substitution raises regulatory challenges for private IPPs on higher quartile of cost curve, and NTPC is better-placed in this scenario. Higher earnings predictability of NTPC compared to power-generation companies importing coal or selling merchant power is another positive. Improving pace of capacity additions also adds strength to its valuations (price to book value of 1.3; price-to-earnings of 12.5 times the FY17 estimates). Motilal Oswal Securities estimates NTPC’s consolidated earnings per share to increase 10 per cent annually, and ROE from 12.1 per cent in FY16 to 14.4 per cent, in five years.