Despite the additional capacity planned, revenue and profits might not improve significantly if coal production and supply is not ramped up by Coal India.
Many of the private players have issues with their upcoming or current projects. While JSW Energy has high proportion of un-tied power which is dependent on merchant tariffs, Adani Power's reliance on imported coal for existing projects is a negative.
Similarly, Tata Power's Mundra project and Reliance Power's Krishnapatnam project are locked at fixed tariffs which does not allow them to pass on the rise in fuel costs.
Reliance Power's 2,400-MW Samalkot project is yet to get gas allocation and with falling gas output in the KG D6 basin, the payback period may be pushed further. Adani Power also has bid for fixed tariffs for most projects and is exposed to fuel risk.
Lanco Infratech is trading at less than its book value due to legal problems abroad, thanks to its coal asset acquisition last year. The coal assets, which require sizeable investments, may also be a drag on its profitability.
In the Twelfth Plan, almost 38,548 MW or 60 per cent of the coal-based projects to be commissioned are expected to rely on coal supply from Coal India.
Another 6,292 MW of capacity is expected to be fuelled by coal imports. These projects may have to operate at sub-optimal load factors if Coal India doesn't supply the agreed quantity, or due to increased cost of imported coal.
Adani Power, Tata Power and Reliance Power are trading at price-to-book values of 2.34 times, 1.92 times and 1.6 times, respectively.
This is not significantly lower that the historical book-value range of 2 to 3 times for these companies. But given the clouded outlook, these valuations leave little room for stock price appreciation.
Bet on Regulated players
Investors who want to take exposure to power sector can go in for regulated players in the generation space, such as NTPC.
It is the largest player in the power generation space with capacity exceeding 35,000 MW. The company expects to add another 31,000 MW by 2017.
A cost-plus model that allows it to pass on most expenses, fuel security and high internal accruals, make it a good bet in the utility space.
The company has signed power purchase agreements (PPAs) for 1,00,000 MW amounting to three times the current installed capacity that secures its revenue stream.
Playing the power sector theme indirectly can also be considered.
Power Grid Corporation, can be a big beneficiary of the capacity additions planned in the upcoming years. And the company does not have to deal with fuel supply risk.
Over the next five years, the company is expected to invest as much as Rs 1 lakh crore in rolling out transmission corridors and strengthening its grids.
PGCIL has already awarded contracts worth Rs 55,000 crore towards this, lending visibility to upcoming projects.
Power Finance Corporation is another company which will benefit from the Twelfth Plan capacity addition.
The total fund requirement from PFC, which predominantly finances generation assets, is estimated at Rs 1.78 lakh crore.
Even if there are slippages in terms of capacity additions, the fund requirement is far higher than the current loan book of PFC which is outstanding at Rs 1.18 lakh crore.
Trading at slightly higher than book value, the stock looks reasonably attractive.
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Power India – A popular blog on Indian Power Sector
Source: Business Line
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