Utilities beat Sensex on rising bargain-hunting by investors, shows data

Power and gas utility companies such as NTPC, Power Grid Corporation, Gail (India), Mahanagar Gas, Indraprastha Gas, and Petronet LNG are outperforming the broader market after years of underperformance.

The Business Standard Utility Index, which tracks the market capitalisation of the country’s top 16 utilities, is up 13.2 per cent since the beginning of this calendar year against a 4.8 per cent rise in the Sensex during the period.

The sector, however, remains a big laggard on a one-year and five-year basis.

Private sector power utilities such as Tata Power, Torrent Power, JSW Energy, Adani Power and Adani Transmission have been the top performers in the last three months, followed by gas utilities such as Mahanagar Gas, Gail (India), and Gujarat State Petronet.

Transmission major Power Grid has also outperformed the Sensex with a 15.3 per cent rise in market capitalisation in the last three months. Gujarat Gas, for example, is up 45 per cent year-to-date while Tata Power and Torrent Power have risen 39 per cent and 35 per cent, respectively, during the period. Analysts attribute the rally to bargain hunting by value investors.

“A majority of power and gas stocks are trading at a big discount to the valuation ratio of the broader market. This has attracted value investors worried about the record high valuation of the broader market, especially growth stocks,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services.

For example, stocks in the BS Utility Index are trading at a PE multiple of 12.4x, based on the net profits of these companies on a trailing 12-month basis.

In comparison, the Sensex is trading at 35x its trailing earnings. Similarly, the BS Utility Index is valued at 1.4x its price to book value against the Sensex’s 3.4x.

Most utility companies, especially those in the public sector such as NTPC, Power Grid Corporation, Gail (India), Petronet LNG, Mahanagar Gas, SJVN and Indraprastha Gas, are consistent dividend payers. The companies on the BS Utility index paid a combined dividend of around Rs 18,500 crore in FY20, with nearly 60 per cent of it accounted for by Power Grid, NTPC, and Gail (India).

This translates into a dividend yield of 3.5 per cent for the BS Utility Index firms, nearly five times the Sensex current dividend yield of 0.72 per cent.

The BS Utility Index doesn’t include Adani Power and Adani Transmission, given a big gap in the valuation of these companies and their peers. Adani Power, for example, is trading at 3x its book value and reported losses on a TTM (trail 12 month) basis while Adani Transmission is trading at nearly 15x its book value and at P/E multiple of 102x. None of these companies pays dividends.

Analysts, however, say the rally in utilities may be overdone, given their poor record and over-leveraged balance sheet. 

The utility companies had gross debts of nearly Rs 4.9 trillion at the end of September 2020, translating into a debt-equity ratio of 1.3x, making these companies some of the most indebted in the listed space.

The combined market capitalisation of these companies is up 49 per cent since the end of March last year against a 70 per cent rally in the benchmark index during the period. The BS Utility Index has rallied 46 per cent cumulatively in the past five years, underperforming the Sensex, which has doubled during the period.

The current valuation is at par with their that in the past five years, limiting the upside for new investors.

There has also been an earnings slowdown in most of these companies in recent years due to slow growth in energy demand in India and industrial slowdown.