Mar 23, 2010|
Power stocks: More pains than gains!
There you have it! What the government has been denying all these years has come true, yet again! We are referring to the lowering of the capacity addition target for the power sector in the XIth five-year plan. The reduction is to the tune of 21%. This is to say that India will now add around 62,000 megawatt (MW) of capacity during the five year period of 2007-2012. This is as compared to the 78,000 MW that were originally targeted!
So, who's the culprit here as the country yet again suffers on account of government's over-promising and under-delivering? We would not like to hazard a guess here. This is because even the government isn't clear who's to blame for the slippage in execution.
Some blame engineering companies like BHEL for delaying the supply and setting up of key equipments. There are others who blame the government for delays in granting the necessary approvals. Insufficient supply of fuels like coal and gas is also blamed for the delays. But no one connected to the sector is ready to take the blame on itself. Neither the engineering companies, not the power producers. Not even the government. Everyone is pointing fingers towards everyone else!
Amidst all this, the Indian economy remains the one that is suffering. The power ministry, on its website, has explained why power generation needs to grow by 1.5 times the annual GDP growth rate. What we are seeing is nowhere near this target. In fact, the sector has been continuously underperforming the economic growth.
The moot question is - how far is this sustainable? How far can the Indian economy grow with its baggage of poor power infrastructure? We do not see this sustaining for a long time now. Maybe the next few years! The GDP might grow at 7-8% for the next few years with the current power setup. But if one is to take a 10-15 year view, things do not seem to be falling in line.
We are reaching a do or die situation as for the power sector is concerned. The private sector has shown some interest of late. But we remain worried about the huge execution issues these companies are likely to face in the future. It's not just about the huge amount of money that they require to expand over the next few years. It's also about the same issues, as we have discussed above, that have hampered the power sector's growth in the past.
As for the future of power sector stocks, it's better to be cautious as an investor than to pay a high price for the cash flows many of these companies are promising 5-6 years down the line. Seeing the opportunity, many companies from unrelated businesses have also jumped into the power fray. Investors would also do well by staying away from them. It's always important to remember that good prospects for a company/sector do not always mean good returns for shareholders.
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