With the CNX Infra Index in a Modi-fied zone and the S&P BSE Power Index gaining momentum, power experts are expecting golden days for the sector. Rahul Kamat explores four stocks that should perform well in the near future.
While the Project Monitoring Group is leaving no stone unturned by clearing more than 88 projects, entailing investments worth Rs 3.85 lakh crore, investment sentiments are high among power players.
In addition, the recent announcement from the Central Electricity Regulatory Authority (CERC) on final tariff regulation for FY15-19 has also brought some cheers to independent power producers and transmission players. Though the regulations have tightened the limit for power generating companies, some respite has been offered for transmission companies. The minimum return on equity (RoE) has been retained at 15.5 per cent. The regulations have retained most of the current operating norms also. Meanwhile, for domestic stock broking companies such as Nomura, Nirmal Bang, Antique, Ambit, Centrum, Emkay, HDFC Securities, IDFC and Kotak, Power Grid Corporation of India remains the preferred pick followed by Tata Power, Adani Power, and KEC Inter¡national. Analysts have preferred these scrips mainly due to their strong fundamentals and debt-equity ratios.
Power Grid Corporation of India Whilst competitive tariff-based bidding has opened up transmission utilities for private participation, analysts believe that PGCIL will maintain its inter-State transmission monopoly, as the projects that it has awarded under competitive bidding, (Rs 16,500 crore in the last three years) are a much smaller amount in comparison to the entity´s regulated FY13-17 (estimated) capex of Rs 90,000 crore. Meanwhile, the FPO has reduced PGCIL´s gross debt:equity to below 70:30. Domestic brokers believe another dilution would not be required after FY17, as PGCIL´s internal accruals would be sufficient to meet its equity requirements. After the equity infusion, PGCIL should be able to meet its capex target of Rs 1 trillion for FY12-17.
Tata Power CERC's much awaited order on compensatory tariff has provided relief to Tata Power. This is a big boost for Tata Power as it had been suffering losses on account of fixed costs and fuel price under-recovery. Although analysts do not rule out challenges in its implementation in the near term, they do not foresee implementation risk in a balanced tariff order whose cost remains very competitive; except for Punjab, other SEBs have given in-principle consent to compensatory tariff in Oct-13; MoP/CCEA direction to CERC/SERC in Jul-13 to allow pass-through of imported coal prices cannot be indifferent to Mundra; TPC had favourable legal advice from AG in Aug-12; and resorting to litigation or rescinding the power purchase agreement (PPA) will be an onerous task for State Electricity Boards (SEBs) and hence compensatory tariff is the only way forward. Although analysts expect plant load factor (PLF) to bounce back to 85 per cent from FY15 which will cut into operating leverage, profit sharing at 60 per cent with SEBs over æbid cost´ makes it revenue neutral. They do expect TPC to recover Rs 1,250 crore in FY15 and Rs 1,100 crore each in FY16 and FY17.
Adani Power The CERC order addresses the biggest concern on Adani Power around its ability to service its debt. Analysts believe the compensatory tariff, along with recovery of past losses, will allow the Mundra project to service its debt and reduce burden on the parent balance sheet. Moreover, the company has a strong case for getting a further tariff hike of Rs 0.15- 0.20/kwh for its Haryana PPA due to change in domestic laws. The CERC order will allow a temporary æcompensatory tariff´ for Adani´s Mundra power plant. Out of 4.6 GW, the tariff hike will be available for 2.4 GW, which includes offtakes signed with Gujarat SEB (Mundra III) for 1 GW and with Haryana SEB (Mundra IV) for 1.4 GW. Both projects will be allowed to be compensated for fuel under-recovery of Rs 830 crore up to FY13. From FY14, Mundra III and IV will receive a tariff hike of Rs 55 paise and Rs 9 paise/unit respectively after adjusting for profits earned by the group in its Indonesian investment and profit earned on merchant sales for Mundra III and Mundra IV. Consequently, analysts have upgraded Adani´s FY15 EBITDA estimates by 20 per cent to Rs 8,300 crore. While the recent developments address under-recovery in energy charges, experts believe increase in capital costs owing to sharp depreciation of the rupee will limit APL´s profitability (owing to aggressive capacity charges in bids).
KEC International KEC International has five decades of experience in turnkey construction of transmission lines with strong international presence across multiple geographies. KEC has the capability to execute transmission line projects up to 1,200kV. With strong execution capabilities coupled with huge investments in the power transmission and distribution (T&D) sector domestically and internationally, most analysts believe KEC is well placed to capitalise on this opportunity. For KEC, international markets such as the Middle East, Africa and the Americas offer strong long-term growth opportunities. Strong growth on the back of PGCIL capex, transmission capacity additions by State Transmission Utilities and also tightening of prequalifying requirements by PGCIL, would enable large players like KEC to win orders.
The order intake during the quarter grew by 16.3 per cent year-on-year to Rs 1,982 crore, aided by good ordering from international markets which now contribute almost 57.9 per cent to the company´s total order inflow. The strong order accretion over the last few quarters has led to a robust order backlog of Rs 10,200 crore.
KEC´s strong order book with transmission orders constituting 88 per cent of the total order book provide assurance of revenue visibility as well as margin improvement (since transmission orders have relatively high margins)
Conclusion In the past 12-18 months, there has been no respite for power companies from headwinds such as lack of fuel (gas and coal) supply. However, power stocks, in the recent period, have rallied strongly in the fourth quarter of FY14 mainly on expectation of a stable government. Now, with a stable government at the helm and removing bottlenecks in the power sector as their prime agenda, private companies will have smoother years ahead. But all depends on the new government´s quick decision making power and implementing strategies.
(The stocks mentioned in this report have been selected based on feedback from industry analysts. Readers are requested to do their own due diligence before investing in any of the scrips mentioned in this article).
I wish to start pvc / pp electric wire unit in Delhi. What kind of information I can get if I subscribe for your magazine
Pls invite me all auction in gujarat
we are doing business developing for solar power ,thermal power , customer supporting and we have 45 mw splar power on hand needs investors.....
pls call +910842559230