Can these stocks 'power' your portfolio? - Views on News from Equitymaster

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Can these stocks 'power' your portfolio?

Mar 20, 2013

The power sector has been struggling for a while now. Amongst the many issues faced by the sector are - fuel scarcity, land acquisition problems, poor financial conditions of customers i.e state electricity boards (SEBs), low tariffs, and lower utilization of capacities.

Over the last few years, while power generation capacity has picked up, production has declined. In other words, the new capacities are sitting idle. Supply of fuel - both coal and gas - is not close to what the demand or requirement is. It is believed that coal-fired power plants are running at rates of about 70%. For gas based plants, the condition is worse. Utilization levels for these were as low as 27.63% in February this year. For thermal power plants, importing the raw material has its own set of challenges. The key one being related to costs - wherein projects become economically unviable. Passing on prices is not an easy thing to do on two key accounts - political implications and the already poor conditions of SEBs. Power tariffs have risen at a much slower pace as compared to the increase in costs over the past many years.

Data Source: ACE Equity

The above chart puts overall investor concerns about the sector into perspective. Rs 100 invested in the BSE-Power index and BSE-Sensex seven years ago would have been worth Rs 88 and 174 respectively as of yesterday. As you would have noticed, the performances of the two indices were in tandem for majority of this seven year period. This was however the situation till mid 2010. Since then, the BSE-Power index has underperformed the Sensex substantially. In fact since mid April 2010, the BSE-Power Index has declined by as much as 45%. On the other hand the Sensex is higher by about 8% since.

Given the substantial underperformance of power stocks as compared to the overall markets, it does bring one question to our mind - Are all the woes and concerns priced into power stocks? While this may be quite a difficult question to answer, we can say this for sure that the risk reward ratio is seems tilted towards the latter. In other words, the downside does seems quite limited.

We say this because the current price to book value multiple of the power index seems to be well below its long term average.

Data Source: ACE Equity

Given that power generation business is very capital intensive, valuing stocks using the P/E ratio would not be the best option. As such, the P/BV parameter would be a relatively better parameter to gauge. Alternatively, one could also cross-check by arriving at an NAV per share. In addition, since utilities tend to have positive cash flows, dividend is one key parameter that can be looked at as well. Dividend yield is a very useful parameter.

CompanyDividend Yield (%)DPS
NHPC Ltd.3.60.7
Torrent Power Ltd.3.26.5
NTPC Ltd.2.54.0
Power Grid Corpn. OfIndia Ltd.2.02.1
CESC Ltd.1.85.0
Tata Power Company Ltd.1.21.3
JSW Energy Ltd.0.80.5

We would like to clarify here that by writing this article, we are not making a recommendation on stocks from the power sector. We strongly recommend investors do their own homework before making the considering buying the stocks from this space.

Devanshu Sampat

Devanshu Sampat (Research Analyst) has a degree in commerce and nearly 5 years of experience in equity research. He draws inspiration from successful value investors across the globe and constantly endeavours to refine his own unique stock picking approach. While a firm advocate of the principles of value investing, he believes in adapting a versatile investing strategy in response to varying market conditions. Devanshu contributes to our Megatrend investing service The India Letter.

Equitymaster requests your view! Post a comment on "Can these stocks 'power' your portfolio?". Click here!

4 Responses to "Can these stocks 'power' your portfolio?"

V.Ramdas

Dec 13, 2014

Dear Sir,

I have invested about 18 months back in stocks like, GVK, Lanco, etc., at an avg. price of Rs.18/- Should I book lose or remain invested in these stocks?. How to enter all stock holdings in equitymaster portfolio?

Like 

SUDEEP

Nov 29, 2014

What is the future of GVK Power and Orient Green Power. Will the prices ever go up. Should we remain invested in these stocks or book loss and quit.GVK Power Brought @ 15/- & Orient Green @ 16/-. Pls suggest..

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manoj

Aug 15, 2013

res.sir
pls suggen me investment in power stock

Like (3)

madvipathireddy

Mar 27, 2013

five x finance

Like (1)
  
Equitymaster requests your view! Post a comment on "Can these stocks 'power' your portfolio?". Click here!

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