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

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

  • MyStocks


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

TATA POWER Share Price Down by 5%; BSE POWER Index Down 2.2% (Market Updates)

Sep 24, 2020 | Updated on Sep 24, 2020

TATA POWER share price is trading down by 5% and its current market price is Rs 53. The BSE POWER is down by 2.2%. The top gainers in the BSE POWER Index are GMR INFRA (up 1.6%) and RELIANCE INFRA (up 1.3%). The top losers is TATA POWER (down 5.0%)..

The BSE POWER Index Down 2% ; TATA POWER Among Top Losers (Market Updates)

Sep 24, 2020 | Updated on Sep 24, 2020

The BSE POWER Index Down at 1,597 (down 2.1%). Among the top losers in the BSE POWER Index today are TATA POWER, BHEL and RELIANCE INFRA. Meanwhile, the BSE Sensex has plunged 1.7% to 37,304.

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 24, 2020 12:41 PM