Power: Time to take cues from foreigners? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Power: Time to take cues from foreigners?

Jul 3, 2012

We need power ... a lot of power. So, prospects of investing in Indian power companies from a long term perspective seem strong. Very simply, the demand for power has been increasing at a much faster pace than the buildup of capacity. So the demand/supply gap is growing.

With this backdrop, power stocks have performed well in the past. The chart below shows that since January 2005, the BSE-Power Index has outperformed the BSE-Sensex for most of the time.

Data Source: ACE Equity

However, post October 2010, project delays and other issues started changing the scenario and power stocks began a steady decline (see below).

Data Source: ACE Equity

Why this decline in the power stocks? Especially since supply cannot keep up with demand?

Essentially the power sector in India has been, and is currently going through turbulent times. It has been contending with a host of issues - fuel (coal) shortages, cost increases, project execution delays, land acquisition related matters, and environmental and government clearances to name a few.

So with costs and delays increasing, and prices essentially locked in via Power Purchase Agreements (PPAs), profits margins and return on equity are weak. As a result, investors' expectations have been considerably lowered, leading to what seems like an episode of "overall sector re-rating" for the power sector.

And with lowered investor expectations, power company valuations have followed suit and have also dropped.

Given the capital intensive nature of the industry, and the resultant high depreciation, valuing a power business on the basis of P/E (price to earnings ratio) is misleading. While there are other valuation methodologies (e.g. replacement value), valuing a power company based on Price/Book Value (P/BV), a measure that takes into account total capital, is a useful indicator.

The chart below shows that based on P/BV, the valuation of the BSE-Power Index (and so the stocks that comprise it), have fallen substantially. The BSE-Power Index's P/BV has dropped precipitously from an average of 3.8 times earlier, to half of that, or as low as 1.9 times in recent months.

Data Source: ACE Equity

Enter foreigner investors... giving us a clue?

"Be fearful when others are greedy and greedy when others are fearful" is a famous saying within the investing community. And this seems to be the precise thought in the minds of the managements of foreign power majors.

A recent article in Mint (a leading business daily) stated that utilities from nations across the world are looking at investing in Indian power projects. Some of these include Electricite de France SA (EDF), GDF Suez SA, Germany's E.ON AG, Tokyo Electric Power Co. (Tepco), Korea Electric Power Corp. (Kepco), and Malaysian state fund Khazanah Nasional Bhd.

In fact, some of these foreign companies are reported to have started their Indian operations by opening offices and assigning teams for identifying projects to acquire a stake in.

And, what is their rationale for wanting to buy stakes in Indian projects? These foreign investors want to take advantage of the Indian power sector's stressed assets. Basically, this means that the current weak Indian power industry situation has made the valuations of Indian power companies seem attractive.

Can this interest and move by foreign investors be a cue for retail investors? We believe so!

For the power sector, we cannot say that 'the worst is behind us'.

However, going purely by valuations, we believe that investors should keep power stocks in their radar, and consider "energizing" their portfolios by adding power stocks selectively.

Equitymaster requests your view! Post a comment on "Power: Time to take cues from foreigners?". Click here!

  

More Views on News

Will the Revival Plan of JSW Energy's Renewable Business Boost its Presence in India? (Views On News)

Nov 26, 2021

How will this move help the company in building and streamlining its renewables portfolio.

The Reason Behind the Thrilling Performance of IEX in the Last few Sessions (Views On News)

Oct 22, 2021

IEX share price has been on a roll recently. The company's shares surged over 165% in the last six months.

Tata Power is Hot. Here's What's Behind its Electrifying Performance (Views On News)

Oct 21, 2021

Tata Power's stock has risen over 70% in the last month. What's driving the rally?

There's a New Kid on the Green Hydrogen Block (Views On News)

Nov 17, 2021

Billionaire Gautam Adani has announced plans to invest up to US$70 bn in renewable energy and produce the cheapest hydrogen in the world.

Solar's Hot in India. It's About to Get Hotter... (Views On News)

Nov 1, 2021

Will this company help India to become the largest player in solar space?

More Views on News

Most Popular

How to Find Undervalued Stocks

A short guide on identifying and investing in the most undervalued stocks in India.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

How to Hit Rs 100 Crore Wealth in Your Lifetime (Equitymaster Wealth)

Nov 15, 2021

This is how you can achieve the ambitious goal of a net worth of Rs 100 crore.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE POWER


Nov 26, 2021 (Close)

MARKET STATS