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Have Power stocks weakened your portfolio?

Nov 25, 2011

Investors having a huge exposure to the once 'sunrise' power sector sector in India have lost anything in the range of 20% to 60% of their investments over the past 4 years. During this time, the benchmark BSE-Sensex shed 17.4% of its value. Hence, most power sector stocks have not just disappointed investors in terms of failure to be the major wealth creators but they have also underperformed against the benchmark indices.

Data source: Yahoo Finance

Supplying electricity to the world's 5th largest energy consuming economy and 17% of the world's population, the Indian power sector has dominated policy making, investments and reforms over the past decade. Consecutive 5-year plans have focused on this sector as a game changer for India's long term future. However, nearly a decade after the Electricity Act got instituted in 2003, the power sector in India continues to remain a victim of humungous transmission and distribution losses. Conceptualization of several Ultra Mega Power Projects (UMPPs) and setting up dedicated power financing, power transmission and power trading companies over the years seemed the perfect set up for a major overhaul. However, fuel scarcity, land acquisition and more importantly policy inaction have paralyzed the growth prospects for the sector.

Despite keen interest from private sector for investments in the power sector, neither power generation nor its transmission and distribution have had any encouraging tales. 65% of India's power generation is coal fired. Scarcity of coal for new capacities, mining loopholes, poor coal linkages and expensive import costs has rendered projects unviable. State Electricity Boards (SEBs) that were supposed to spring back to health after the Electricity reforms are once again bleeding to death with T&D losses. State governments or PSU banks will have to write off loans going into billions for these entities to get back on their feet. At such times, one would indeed wonder if the sector or its major players deserve to be in one's long term investment portfolio.

Without denying that clarity on the reforms and policy front are pertinent for the power sector to recover, we believe that every risk can be priced into a stock. The power sector is instrumental to the growth of the Indian economy and its long term interests are tied to India's economic well being. Hence the recovery of the sector is a question of not if but when. We do not think that from the current levels, power sector stocks in India, especially the few well managed businesses, will have significant downsides. In fact, with adequate margin of safety one can certainly hope that some of these will be the dark horses in the portfolio in the longer run.


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1 Responses to "Have Power stocks weakened your portfolio?"

Dara Kalyaniwala

Nov 30, 2011

I believe that growth of Power Sector will be the KEY to growth of other Industries in India. Hence it is SHOCKING to find that there are no encouraging tales in the Power Sector.
Which do you think are the dark-horses of the power sector? Will Companies like Orient Green and IndoSolar do well? Somehow I am not attracted to Adani Power and Reliance Power. Will Tata Power do well? Even if it is expected to do well, Tata Power cannot certainly be caleld a "dark horse". So which companies in your view demand investor attention at this point?

Regards

Dara Kalyaniwala

Like (1)
  
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