Power Sector

#1
Dear Alchemist,

I am a new members over here.:)
Have just got the idea how to post msg.

So, starting with the most buzzing sector of the current times - Power sector; which i feel will continue to remain in lime-light for times to come irrespective of the current valuations.
My question is which of these Power Generator companies do u feel are reasonably valued ? (Though, i agree power is in no means in those brackets that are comfortable valuations.)

NTPC, REL or Tata Power among Large-caps.
NTPC seems to be the biggest of all with REL & Tata Power no where near to the size of this company. But, now that REL has already bagged 2 UMPP & 1 more project win (Tilaiya) in the array, may be it is also in the big league in the coming few years.

Pls reply with your view on this & oblige !!
 

Alchemist

Administrator
Staff member
#2
(I posted a reply to this thread, but the reply was deleted because of a database problem.)

As far as the power stocks go, I think the valuations are too stretched for me to recommend a buy on these stocks. As mentioned in this thread on Power Grid, Indian power companies are much more expensive than power companies in not just developed economies, but also compared to fast growing Chinese power companies.

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If given a choice, I would prefer to invest in power equipment stocks like BHEL for the next 3 years.

BHEL had a net profit of Rs 2414 crore in FY 2007.

With 48,95,20,000 shares outstanding and current price of Rs 2730, the market capitalization of BHEL is Rs 133639 crore.

FY 2007 eps = Rs 49.3

Thus BHEL is trading at 55 times FY 2007 earnings.

This may look a bit expensive, but BHEL has been growing profits at 50% annually for the last three years.

FY 2008 eps is expected to be around Rs 65.

FY 2009 eps is expected to be around Rs 83.

(FY 2009 will start in 4 months.)

At Rs 2730, the stock is trading at 42 times FY 2008 earnings and 33 times FY 2009 earnings.

What makes BHEL an attractive investment for the long term is earnings visibility.

The company has Rs 70000 crore order book. (4 times FY 2007 sales).

Irrespective to what happens to global economy, BHEL will have enough work in next 3 years.

If one is willing to hold for next three years, BHEL would be a good pick. (It may not give much returns in next 6-12 months as current valuations are a bit expensive).

Emkay has a target of Rs 3300 for BHEL.

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Larsen & Toubro is a similar case....with medium term valuations stretched, but very strong order book and good earnings visibility.

L&T's order book is around Rs 44000 crore. (2.5 times FY 2007 sales).

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Note: Stocks like BHEL, L&T are unlikely to be multi-baggers in next 2-3 years. These stocks have discounted the future to some extent and are richly valued. However, they look attractive due to the low risk that they carry because of high earnings visibility.
 
#3
Bhel

Thank u dear Alchemist for your detailed reply.

Yes... even i agree, Power sector valuations are expensive & am equally bullish on BHEL. Currently it has about 70k cr of order book which may reach aroun 1 lac to 1.50 lac in next 3 yrs as & when inevitable orders for power eqpts. start flowing in from the N-deal.

I also get a feeling, that BHEL is a bit slow in its stk price movement vis-a-vis Private majors like L&T & ABB. And, if the big N-deal successfully flows thru; BHEL is inevitable- to satisfy country power needs in power eqpts.

Thanks for your reply !!
 
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#4
Well then listening to all these things I think BHEL is not a good choice for next one year, but in 3 years it may give handsome returns. I am now looking towards the midcap stocks of POWER sector. Alchemist, whats your say on this category?
 

Alchemist

Administrator
Staff member
#5
Some interesting statistics:

5-year plan ending. (Installed capacity for power generation).

6th Five-Year planned ended 31.03.85 (42585 MW).
7th Five-Year planned ended 31.03.90 (63636 MW).
8th Five-Year planned ended 31.03.97 (85795 MW) (2 annual plans + 1 five year plan).
9th Five-Year planned ended 31.03.02 (105046 MW).
10th Five-Year planned ended 31.03.07 (132329 MW).

Target for 11th Five-year plan - 31.03.12 (200000 MW).

The target for 10th Plan was addition of 43000 MW, but only 27283 MW were achieved. It would be a miracle if we achieve 200000 MW target by 2012. :D.

As the above statistics suggest, power generation sector as a whole, is a slow grower. For the next five years, the capacity addition target equates to only 8.5 annual growth. That is the reason why power generation/distribution companies get low valuations worldwide.
 
#8
Phase buying

I think one can buy BHEL in few phases. Like 1st phase can be bought @2400/- levels & 2nd phase @2200/- levels.

But, for those who dont have this jewel in their portfolio already - may even buy in small lot at @2500/- to average only at every 5% dips. It is better not to try to time the market/stock-specific & miss the bus altogether if & when stock starts moving up without those illusive bottoms actually being triggered for you. So, use strategy of phase buying at various price intervals in small quantity.

India needs as many as 2-3 companies of the size as big as BHEL to satisfy the highly-specialized & critical power equipment needs of the country.
 
#10
Re: Doubt in investing.

Hi,

I am new to this stocks investing. I need a clarification.
On basis of my study, I thought its better to have a diversified portfolio and hence started researching sector by sector. Since lot is being discussed these days regarding power/energy I thought I will start by this one.

Now my Q is in case of power sectors, the major players are NTPC,Reliance POWER and TATA power. Now is it adivsable to buy stocks from 2 of these 3 players. Or do we have to choose only one for maximum profits? It basically boils down to the Q that, after some long term ( say 2-4 years?) is only one company is going to get benefited? IF i buy stocks from 2 companies and if one goes down and other goes up, then my net benefit wont be much. Or is it advisable to analyze and put all money in just one company?

I guess the logic of buying stocks from one ore more huge players varies from sector to sector. And if so, what should be done in case of POWER sector. Please advise.
 

Alchemist

Administrator
Staff member
#11
Hi,

I am new to this stocks investing. I need a clarification.
On basis of my study, I thought its better to have a diversified portfolio and hence started researching sector by sector. Since lot is being discussed these days regarding power/energy I thought I will start by this one.

Now my Q is in case of power sectors, the major players are NTPC,Reliance POWER and TATA power. Now is it adivsable to buy stocks from 2 of these 3 players. Or do we have to choose only one for maximum profits? It basically boils down to the Q that, after some long term ( say 2-4 years?) is only one company is going to get benefited? IF i buy stocks from 2 companies and if one goes down and other goes up, then my net benefit wont be much. Or is it advisable to analyze and put all money in just one company?

I guess the logic of buying stocks from one ore more huge players varies from sector to sector. And if so, what should be done in case of POWER sector. Please advise.
Over-diversification can also reduce your returns.

The best strategy is to invest in the best stocks across various sectors.

My opinion is that an ideal portfolio should contain 12-25 stocks.... depending on the size of the portfolio.

Not more than 20% allocation should go to one sector and not more than 12% should go to one stock.

(Actually, even I don't follow the above rule :D).

Valuations are the most important factor while selecting a stock for investing. Growth is good, but there is a price for every thing. Beyond a certain price, all stocks become a bad investment.

You should read this thread on why growing companies do not always mean an increasing stock prices.

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In my opinion Reliance Power has hardly any value left at Rs 370 and I won't even look at this stock unless it falls below Rs 250.

NTPC appears to be the best stock in the power sector, but it is also expensive at this price of Rs 200.
 
#12
Thanks

Hi Alchemist,

Thanks for the advice. Yes even NTPC appears to be high at 200, shall see if i can allocate some funds to it. Else I should be looking at some other sectors. I believe Infrastructure is going to be a good developing one . Any other sectors which are estimated to be having good profits in coming years?
 

vasa1

Well-known member
#13
Power: Long-term play
Devangshu Datta / New Delhi August 16, 2009

.....Any investment in generation is therefore, a long-term play that carries a lot of risk. If 15 percent RNW is a sector norm, (tariffs will always be regulated) is it worth it? Investments elsewhere on the value-chain could yield safer, quicker and potentially higher returns. Equipment manufacturers and power traders for example, seem like safer plays.
Source

Alchemist, as you have said earlier in this thread, it is better to go for companies that are in the power sector but not the power generators.

1. This quote echoes your view, but please explain the bit about RNW (RoNW) and the cap on earnings.

2. The author also suggests power trading companies. What are your thoughts on that aspect? Only PTC comes to mind.
 

vasa1

Well-known member
#16
Here is a broker's view on a power sector IPO (JSWE). It has some points of relevance to the power sector ...

On related party-transactions:
if the merchant power market is robust then probably, the entire quantity would go to merchant power and if that doesn’t work then it goes to JSW Steel. So that is our concern pertaining to the related parties in action.

In a scenario in which merchant power rates crash (!!!)
:
post the merchant market getting crashed, there could be an offtake risk for many of these private sector developers, who are preferring the merchant market more rather than a long-term PPA model.
On Chinese:
Given that the chemical composition of coal in India has higher ash as well as higher moisture content, which is unlike Chinese coal. You could have some stabilization issues with the Chinese equipments.
 

vasa1

Well-known member
#17
And now, a view suggesting that merchant power is not going to be that attractive going forward:

Utilities with low exposure to merchant market may benefit.

We prefer utilities with low exposure to the merchant market: NTPC Ltd and Tata Power Co. Ltd. JSW Energy Ltd’s and Adani Power Ltd’s earnings could be volatile given high exposure to merchant power.
I'm not sure I follow the arguments, but here's the link.
 
#18
I was looking to buy some power sector stocks if the market corrects from these levels. I was researching about some power sector stocks and after going through the financials and capacity addition commitments, power sector looks fair valued. If the market corrects 5% from here on, one can invest in power sector stocks.

Some of the power sector stocks and their valuations:-

NTPC:- 17.5*FY10 EPS

The biggest power sector company. Earning visibility is good. Turnover expected to grow 10% annually.

EPS also expected to grow 10% compounded. The company does not carry much debt. Strong expansion planned which may further improve the revenues and EPS.

Reliance Power:- 153*FY 10 EPS

Probably the fastest growing company in India with huge earning visibility. The only problem is it rich valuations. Current execution capabilities look strong and the company belongs to the prestigious ADAG. If the company fulfills it promise of 37000 MW by 2017, it will surely be a multibagger with a price target of Rs 1000 by 2017.

But, the execution of the company remains a key risk. Huge amount of debt, which consists of a huge foreign debt as well is also a huge risk. The strategy on this stock should be to buy on dips and follow the technicals sincerely while selling.

Also, the P/BV of this company is close to 3, which is not much considering the valuations at which power companies usually the high growth ones trade.

Adani Power

Another company with huge growth potential but my belief is that Reliance power is better priced than this company.

Tata Power 33*FY10 EPS

Decently valued considering its huge investments and that it sells the power as well. It's the most decently valued of all the power companies. It has huge earning potential.

Lanco Infratech

Smaller company than its peers but expanding rapidly. It can go for an IPO of its power projects and make it into a separate company which can be a huge positive for the stock price.

Other companies include Sterlite Energy, JSW Energy, Jaypee power and many more.

I am waiting for a 5-10% correction in the indices and my belief is that the correction will be deeper in the power sector which can make these stocks interesting.

I am interested in NTPC (due to its stability), Rpower (due to rapid growth expected), Tata Power (due to good valuations) and Jaypee power (Due to huge experience of the promoters and the company is attractively valued)

Please suggest which stocks I shall buy with a time frame of 2-3 yrs.
 

magnet

Active member
#19
Whats the take on this sector now?

When rel power ipo came all were dying for it saying it's the future need.

Now all of a sudden that ipo never remain positive on contrary people are suggesting to stay away from the sector saying when they'll come up they will face stiff competition as there will be surplus and heavy competition.

All of a sudden not seen positive.

I am myself caught with rel power, adani and jsw energy and plus they are not even dividend paying stock .

So what should one do with it. Is there a point to further keep it long.

At-least adani is positive all after ipo but others have proved to be dampener for me.
 
#20
The reason is very simple

Country's demand for power is expected to increase by 315,000 MW by 2017 requiring an investment of $600 billion (Rs. 2,580,000 crore) if the economy continues to grow at 8%. At present, India has an installed capacity of 144,565 MW. So the numbers speak for themselves.

Investing in power companies won't work because they are walking a tight rope and they would need lots of cash for building more power plants and during construction period no one earns money but they spend more, so in this case investing in power finance companies would pay off. This sector would need lots of cash in next 5 to 10 years and biggest beneficiary would be finance provider and power equipment manufacturer. So companies like PFC, RECLTD, IDFC, Areva T&D, Alstom, BHEL (Don't like BHEL but it is a candidate), etc would outperform all other power producing stocks. :idea:.
 
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