[ad_1]
Power sector stocks are in focus again. There are two camps now since the stocks have run up. One camp says that valuations are not very attractive anymore, even though the investment argument remains strong. The second part says that even though the returns in this space are capped, the volumes can go up because of high demand and new capacity adding up. Which side of the argument in power stocks are you weighing on?
Rupesh D Sankhe: The fundamentals are very strong. If you compare with the two-three parameters, consumption is growing at around 8% to 9% unlike 5.5% that we have seen during 2009 to 2019. Even in terms of peak deficit, it is now close to 0.4%. We have seen a surplus of around 11% in 2012-13. Coal production has also gone up significantly, unlike the 4% that we have seen earlier. So, the fundamentals are very strong.
Unlock Leadership Excellence with a Range of CXO Courses
Offering College | Course | Website |
---|---|---|
Indian School of Business | ISB Chief Technology Officer | Visit |
IIM Kozhikode | IIMK Chief Product Officer Programme | Visit |
IIM Lucknow | IIML Chief Operations Officer Programme | Visit |
There is no doubt that most of these companies will run at a better plant load factor and they will get a benefit of higher merchant rates as well as better incentives. But on the other hand, the valuation is slightly stretched for the private players. They are quoting at around close to 13 to 14 EV-EBITDA multiple, close to 4x to 5x price to book value multiple which is definitely on the higher side that we have seen historically. But a few pockets where we also are positive like NTPC or CESC. Those companies are still trading at a reasonable valuation. The fundamentals are very strong, no doubt. Valuations have stretched. But there are few companies which will have a better valuation going ahead.
Okay, so you see improvement on the likes of CESC, etc, where there is still value on the table. But how are you differentiating and on what basis because with Section 11 coming in, that merchant power tariff that the likes of Torrent Power, etc, were going to get might get limited as well. What is your take on that and the entire Section 11 thematic which is playing out right now?
Rupesh D Sankhe: In April, we saw peak demand of around 220 gigawatt and this summer we are expecting close to 240 to 250 gigawatt kind of peak demand. And we do not have enough surplus capacity as of now. Also, renewable capacity is not adding in the way we were expecting earlier. So, definitely, the stressed asset in the coal that has already got a Section 11 extension till October and the gas has also come into this Section 11 category.
So, companies like Torrent Power with a surplus capacity on the gas side will benefit from that. Out of 24 gigawatt, close to 15 gigawatt capacity will come on steam if Section 11 gets introduced for gas. So, those companies will benefit. In terms of volume, companies like IEX, Torrent Power, JSW Energy will benefit from the higher merchant capacity they have in the next two to three months because of the increase in the peak demand.
In terms of the capacity expansion, do you have a view on the ancillaries as well? Apart from the pure play generators, which are the other themes that you would recommend investors to look at positively now? What about the likes of Thermax, BHEL – the transformers, rectifiers, even transmission companies?
Rupesh D Sankhe: If you look at India’s capex for the power value system, close to Rs 54 trillion opportunity is there for the next 15-20 years. With the kind of investment that is happening on the solar, wind side, companies like Suzon Energy, Inox Wind will benefit from the RTC tenders as well as the wind auction which is happening. On the other side, smart meter manufacturers like Genus is there. Then on the HVDC side, in transmission substations, ABB, Siemens will get benefit out of that. Then, on the thermal side, because of 80 gigawatt of incremental capacity addition in the next 10 years, Thermax, BHEL will be in focus. So, the entire value chains will benefit from this huge capex in the next 10 to 12 years.
[ad_2]
Source link