Mumbai: The Street is gradually turning positive on the power sector after a long time. Several factors have come together to make the environment conducive for power companies. Lower coal prices, revival in power demand, easing transmission hurdles and possible improvement in the financials of distribution companies would give a fillip to power generators. Power stocks have been battered over the last three years compared even though the Sensex has been steadily rising. But now there are murmurings that the sector could coming out of the woods as some of the issues are getting resolved.
Coal shortage has been a bane of the sector for the last several years, as Coal India could not produce enough coal to feed the power plants in the country. Imported coal wreaked havoc with the financials of the generators. The share of imported coal in the fuel basket rose from three% in FY08 to 10% in FY13 and that too on a higher base. Coal prices also shot through the roof during this period. Coal imports rose from Rs 3200 crore in FY08 to Rs 17,200 crore in FY13, claim analysts. But with the government committing to produce one billion tonnes of coal by FY20 and global coal prices falling by over 25%, the input cost of most producers will come down. Falling coal prices will even make those power plants viable which are fired by imported coal as lower coal costs would lead to savings of Rs 0.50/unit of power. According to Motilal Oswal, total savings on units generated (on project with pass-through benefit) due to imported coal could be Rs 7,900 crore – 16% of FY13 cash losses.
Even though the market does not expect Coal India to achieve the target of one billion tonne coal production, even if it produces higher than current levels, generators like NTPC would benefit as the plant load factor of its units would improve. UBS prefers utilities with high return on equity (profile) and growth visibility, but without the need to change regulations. Tata Power’s compensatory tariff hike and changes in NTPC’s regulated returns are overhangs in such a case. However, Religare Institutional Equities believes that bonus debentures and a few proposed acquisitions would help shore up NTPC’s return ratios.
Analysts are also very bullish on JSW Energy as it is the least levered utility and its 3.14 GW thermal power portfolio is generating power. UBS expects it to generate free cash flow of Rs 2300 crore in FY16. Also the acquisition of JP Power Venture’s assets will be earnings accretive from next year. JSW Energy has risen 119% over the last year.
