Opportune time to invest in power stocks over 1-3 years

Amid the new found euphoria, power stocks have emerged as the best bet to invest in, according to market analysts who foresee great potential for the sector.

With the political uncertainty over the 123 agreement now behind, analysts feel that the Indo-US nuclear deal will give a major fillip to this sector. This was evident from the jump in all power stocks on Tuesday ahead of the trust vote.

The biggest plus for the sector is the support of the government, which has allocated around Rs 5,00,000 crore for power in its 11th Five Year Plan.

The country’s total installed capacity is currently 1,44,565 MW. The capacity addition envisaged in the 12th Five Year Plan is 82,000 MW, comprising 30,000 MW of hydro, 40,000 MW thermal and 11,000-13,000 MW nuclear.

“No government can ignore power, as it’s the backbone of industrial production. This sector alone constitutes 3.5 per cent of GDP production, as against 2.5 per cent by agriculture sector,” said Dillip Davada, an independent research analyst.

In the last five years, all power sector companies have recorded a CAGR of 24 per cent on an average and Davada expects this figure to reach 30-35 per cent in a year’s time.

A good number of power companies are expected to raise Rs 1,50,000 crore from the market for their expansion projects by the end of 2009. National Thermal Power Corporation, shares of which closed at Rs 190.25 on Wednesday, plans an investment of Rs 29,000 crore while Reliance Infrastructure (earlier Reliance Energy) and Reliance Power are planning a total capital expenditure of Rs 60,000 crore. Tata Power will invest Rs 12,000 crore in greenfield projects.

“As of now, power sector is the safest bet to park your money in stock markets. Banking on the huge energy requirements of the country, power companies will continue with their greenfield projects,” said P K Agarwal, head of equity research, Bonanza Portfolio.

Rs.1016.70), Tata Power (LTP: 1124.40), Reliance Power (Rs 171.10), Power Grid Corporation of India (Rs 102.40), Power Finance Corporation (Rs 135.25) are value buys for investors.

Increasingly, natural gas is now replacing crude oil as an energy resource. Recently, NTPC tied up with Petronet LNG for its gas based power plant.

“If this trend continues, it will play a key role in boosting the power sector,” added Agarwal, who feels that the steel and cement companies having captive power plants of 200-300 MW will sooner or later emerge power scrips as well.

However, the depleting stock of coal in India might pose a threat to thermal power generation companies, which constitute 53.3 per cent of total power produced.

Said Alex Mathew, head of technical research at Geojit Financials, “the stock of coal in India is limited. Sooner or later, nuclear power will take over from thermal power, the former having the cheapest tariff per unit.”

Companies like NTPC and others are shortly planning to set up nuclear power plant, according to Mathew.

He does not find anything worrisome in it, as power companies are now bidding for coal mines in Australia and South Africa, joining hands with miners abroad.

Geojit’s research reveals that some power stocks that have outperformed the markets so far are quoting at higher price to earnings multiple than the benchmark Sensex. These are Tata Power (PE ratio of 14.9), Reliance Infra (PE: 20.16) and NTPC (PE: 20.03).

In a bearish market, it is an opportune time to invest in power stocks with a time horizon of 1-3 years, concluded Geojit’s Mathew.

Today, the BSE Power Index was down 0.47 per cent to 2,694.49 in comparison to the benchmark Sensex which was down 0.90 per cent to 14,807.24 after touching a high of 15,130.09.

The gainers comprised Reliance Power (up 5.15% at Rs 179.80), GMR Infrastructure (3.48%), Suzlon Energy (2.04%), Reliance Infrastructure (1.89%), Crompton Greaves (1%), ABB (0.91%), and Torrent Power (0.48%).