Tariff reduction dims power stocks

The BSE Power index has underperformed the index this year; recovery may happen only post-elections say experts

Talk of reduction in power rates and an audit of distribution companies have cast a shadow on the stocks of power companies. This year, utility stocks have underperformed the markets, and the BSE power index is at the top of the list of major losers among BSE sectoral indices. So far this year, the index has fallen 6.4 per cent, against the Sensex’s one per cent rise.

Through about three years, Indian utility companies have underperformed the Sensex by 43 per cent, owing to concerns such as lower merchant rates, unavailability of fuel and the health of distribution companies. The recent 20 per cent cut in rates in Maharashtra has further dampened sentiment in the power sector.

Analysts, however, aren’t too perturbed, saying these cuts may be rolled back after the coming Lok Sabha elections. Bhargava Buddhadev, power sector analyst at Ambit Capital, says, “A similar thing had happened in April 2004, when power was sold at a lower rate to the agriculture sector, but that was only for 15 months. Also, any subsidy announced by the state government has to be paid upfront to power producers. So, it’s unlikely to affect power companies.”

Through the past year few years, many steps have been taken to resolve key issues relating to the power sector, including financial restructuring for distribution companies, and fuel supply agreements. But these failed to impress investors in the power sector. On Thursday, stocks of NTPC, Reliance Power and Power Grid Corporation closed at Rs 131.10 (down 1.1 per cent), Rs 67.95 (down 0.8 per cent) and Rs 98 (down 0.1 per cent), respectively, on BSE. While Tata Power closed at Rs 76.95 (up 0.1 per cent), Adani Power closed at Rs 35.05 (up 1.2 per cent).

Analysts expect power stocks to remain subdued, as investors are worried about whether or not the general elections will result in a clear mandate. If there isn’t one, rate cuts may continue for some time and further reforms in the sector may be delayed. Buddhadev says, “For now, investors have little confidence in the outcome of the elections and most are preferring to wait and watch and will take a view only after the elections.”

Reforms announced in the past year might, however, benefit power companies in the long run. A recent report on the utility sector by Goldman Sachs said, “Recent reforms — higher coal supply for generators and debt restructuring for distribution companies — limit further downside, improve liquidity and reduce risk for lenders. However, we expect returns on investment to improve only gradually.”

For now, analysts say the sector looks extremely undervalued, adding the general elections may revive fortunes. “All these stocks are being quoted at ridiculously low valuations. If the election results are positive, there could be a re-rating in the sector,” says Buddhadev.