Top Five Power Performers| Company | Market Cap. | Net Profit | y-o-y Net Profit | Net Sales | y-o-y Net Sales | EPS (basic) | Share Price |
| | (Rs cr)1 | (Rs cr)2 | Growth (%) | (Rs cr)2 | Growth (%) | (Rs) | (Rs)1 |
| NTPC | 1,40,914.99 | 7,414.80 | 8.01 | 37,050.00 | 13.54 | 8.99 | 170.9 |
| Bharat Heavy Electricals | 81,698.44 | 2,859.34 | 18.41 | 19,365.46 | 12.34 | 58.41 | 1,668.95 |
| Power Grid Corp. Of India | 41,288.73 | 1,448.47 | 19.54 | 4,614.82 | 27.73 | 3.6 | 98.1 |
| Suzlon Energy | 32,781.72 | 1,265.71 | 19.28 | 6,926.01 | 28.73 | 8.7 | 218.8 |
| Tata Power Co. | 24,628.09 | 869.9 | 24.84 | 5,915.91 | 25.46 | 38.64 | 1,115.50 |
1 As on 30 July 2008 2 FY 2008 y-o-y: Year-on-Year EPS: Earning per share
These stocks are not OLM recommendations. They are the top five companies in the sector based on market capitalisation.
This shows the high correlation between the performances of the economy and the power sector. Fast economic growth in the last financial year perked up the sector and moderate growth in the previous quarter pulled it down.
The industry expects rising incomes to push up per capita power consumption from around 600 units at present to 1,000 units by FY 2011-12. This is a big opportunity for the sector. Recognising the role of energy in economic growth, the government has initiated reforms in all the segments of the sector—generation, transmission and distribution.
Power is a capital intensive sector and high interest rates will continue to hurt it. In spite of the opportunities, current market conditions have raised doubts whether the sector can replicate its past growth. OLM brings experts to discuss these and other issues.
Investment Needed
RAJAT MISRA VICE PRESIDENT, PROJECT ADVISORY & STRUCTURED FINANCE, SBI CAPITAL MARKETS
Growth prospect. There is a significant deficit in power supply. The CAGR of power generation was only 5.1 per cent during the 10th Plan. So, significant investments will be needed in generation to reduce power shortages if the GDP growth rate has to be maintained. The transmission and distribution segments will require commensurate investments as the generation capacity increases.
Interest rate impact. In the short to medium term, rising interest rates will affect the new investments planned. The impact would be moderated to the extent the existing companies can pass the impact to consumers. This applies to public sector companies and existing private sector power plants. But new projects that have been awarded on a bid basis and do not enjoy the luxury of pass-through will be affected more. Some projects that do not have strong sponsors but have been bid aggressively may face difficulties. However, we believe that the current interest rate scenario will soften in a few months.
Key issues. The 11th Plan estimates that the sector will require almost Rs 10,00,000 crore. The limited capacity of the domestic market, both debt and equity, will not be able to fully meet this need. Thus, it is necessary to attract overseas money into the sector. However, this will not happen till the reforms are taken to their logical conclusion.
Healthy Scenario
SUNIL SINGHANIA EXECUTIVE VICE PRESIDENT, EQUITIES, RELIANCE MUTUAL FUND
Growth prospect. The power sector has tremendous growth potential. India is a power-deficit nation and has an economy that is growing very fast. Also, with per capita income increasing and slated to rise above $1,000 (Rs 41,890) per annum soon, the demand for basic needs like roads, power and water is going to be very strong.
Interest rate impact. Infrastructure projects are capital intensive and rise in interest rates is definitely going to impact power projects. However, large companies such as NTPC, Reliance, Tata Power, Jindal and Sterlite that are setting up power projects are well capitalised and have achieved financial closure for many of their projects. Also, foreign funding, both debt and equity (private equity), is still available for stable and long-term businesses. Thus, there might be some slowdown, specially in the power plans of smaller companies, but overall, we can expect healthy growth.
Key issues. The assured IRR (internal rate of return) is 14 per cent for new power projects with PPAs (power purchase agreements). Now, with interest costs inching to those levels, there is no great incentive to set up power projects. Also, due to capacity constraints, getting the equipment and putting up the project in time is a great challenge. While India is coal surplus, most of the capacity is unexplored. We need a more buoyant mining policy that ensures proper allotment and use of this coal so that power is available to all at an affordable price.
Potential To Grow
PARAG SHARMA HEAD, POWER SECTOR, ICRA MANAGEMENT CONSULTING SERVICES
Growth prospect. According to the 17th Energy Power Survey published by CEA (Central Electricity Authority), the demand for electricity in the country is projected to increase by 7 to 8 per cent. But a report by McKinsey, titled ‘Powering India: The Road to 2017’, says that the demand will grow up to 19 per cent. Hence, both in the short and long term, there is a huge potential of growth in the power sector.
Interest rate impact. Now, Indian utilities have moved from the MoU (Memorandum of Understanding) route of power procurement to tariff-based competitive bidding. While the standalone tariff of the plant mattered in the MoU format, in tariff-based competitive bidding, the tariffs of the different bidders are taken into consideration. Hardening of interest rates will definitely create differences in the cost of production of plants, depending on when they achieve financial closure.
Key issues. There are considerable default risks for the other players in the industry if the reforms do not succeed in the distribution business. So, the entire value chain in the power sector is looking at the viability of distribution companies (discom). In a state like Uttar Pradesh, the cost coverage of discoms is only 60 per cent. This has led to a cash gap of about Rs 10,000 crore in a year (without considering government subsidy).
The OLM Take
Electricity consumption has an elasticity of 0.95 per cent (KPMG estimates) with respect to GDP, implying that any economic growth slowdown will pull down power sector’s growth by the same extent. Rising interest rates increase the cost of financing power projects. Larger companies may escape the impact of this factor, but the smaller ones will suffer. Inefficiencies like transmission losses and non-realisation of dues put additional burden on the financials of companies. Though demand will remain in the sector, near term growth will slacken.
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