Investment Opportunities in the 'Power Sector' of India

5 min read
Investment Opportunities in the 'Power Sector' of India

On April 19, 2020, there was a headline in Business Standard as Cabinet may approve a relief package for power discoms next week. First of all, If you don’t know what are discoms, would you be interested to know about any relief package? No!

So, today we will explore the ‘power sector’ of India, its working and some investment opportunities as of today.

Whenever we are talking about power sector companies, we divide it into three categories.

  1. Power Generation companies or GENCOs
  2. Power Transmission companies or TRANSACOs
  3. Power distribution companies or DISCOMs

As the name suggests, GENCOs are the ones who generate the electricity, Second, we have the TRANSACOs— companies responsible for transferring the electricity from the power stations to states far and wide and Finally, we have the distributors, the DISCOMs —companies responsible for bringing electricity to your home.

So, The concept is simple, Once power generates in Gencos, it would be sent to the Discoms, so that they can sell it to the end consumer. But, Unfortunately, that doesn’t happen. Instead, there are leakages at multiple touchpoints. Maybe the transformers are old or lines are poorly maintained or maybe this:

So, Discoms never get what they deserve. Anyways somehow even if they have served the end-user, But then also there’s no guarantee they’ll get paid in full.

India’s distribution companies lose around 360 rupees ($4.63) on every megawatt-hour of electricity they deliver — equivalent to roughly 10% of the retail price. Spread that across a market generating more than 1.5 billion megawatt hours a year, and the losses quickly mount up. Total debt in the sector now amounts to 4.3 trillion rupees ($56.4 billion).

This is not the end of the suffering, most Discoms are still owned and operated by state-run governments and governments force Discoms to supply power at cheaper prices in a bid to appease their vote bank. Although its good for the poor people who can’t afford to pay the bills but also a big burden for Discoms. Although government promise for the compensation, but do they actually fulfill the promise? As on Dec 03, 2019, State government departments owe Rs 41,700 crore to discoms.

Result: When Discoms run out of cash, they start borrowing and increase the debt or sometimes start deferring their own payments — to the power generators and the transmission companies. Now, suffering has been spread to all three.

The central government needed the do something before the whole sector collapses and you have to spend your summers without AC. So Back in 2015, they launched the UDAY scheme in which the state government takes 75% of the Discom’s debts and then it charts out a plan to improve efficiency and reduce costs across the board.

Problem solved? No, Here comes Covid-19

Now Schools, factories, offices, shops all are closed. You aren’t even allowed to go out. No doubt, Discoms are expected to lose thousands of crores in revenues and add more debts pile. This is the income they’ll never be able to recoup. You won’t buy another AC and use it, not because you need it but rather you are more worried about Discom’s revenue rather than yours. There’s no scope for ‘more demand’ when it comes to electricity. It’s gone forever.

India reaches the electricity generation capacity of 365 GW

Even if power consumption drops, they’ll still have to keep paying these dues.
Now, the government had to intervene again and they did.

March 28th, the government allowed distribution companies to defer payments to Gencos for three months offering some much-needed relief. (Discoms already owe Gencos a whopping Rs 92,000 crores) so most probably the government needs to intervene again.

Market size of power sector:

Sector Composition:

Key Trends:

I have listed down three ‘worth to invest’ power stocks for you.

1. K E C International Ltd (178 Rs.)

Fundamental analysis at a glance:

Market Cap: 4,577 Cr | Stock P/E: 8.01 | ROCE: 28.63 % | ROE: 22.36 % | Debt Equity Ratio: .22 | Free cash flow 5years: 2,655 Cr. | Inventory turnover ratio: 17.35 | Pledged percentage: 0.00 % |Interest Coverage: 3.51

2. Power Grid Corporation of India Ltd (159 Rs.)

Fundamental analysis at a glance:

Market Cap: 83,261 Cr | Stock P/E: 7.70 | ROCE: 28.63 % | Dividend Yield: 5.23 % | ROE: 10.44 % | Debt Equity Ratio: 2.20 | Free cash flow 5years: 2,858 Cr. | Inventory turnover ratio: 24.15 | Pledged percentage: 0.00 % |Interest Coverage: 1.87

Goldman sachs has given a buy rating to Power Grid with a target price of Rs 225.

3. NTPC Limited (92.35 Rs.)

NTPC has been operating its plants at high efficiency levels. As on 31.03.2019 the company had 15.5% of the total national capacity and, it contributes 22.3% of total power generation due to its focus on high efficiency.

Fundamental analysis at a glance:

Market Cap: 92,415 Cr | Stock P/E: 6.47 | ROCE: 5.88 % | Dividend Yield: 5.87 % | ROE: 13.18 % | Debt Equity Ratio: 1.48 | Inventory turnover ratio: 11.32 | Pledged percentage: 0.00 % |Interest Coverage: 2.65

Jefferies has given a buy rating to NTPC with a target price of Rs 125.

Note: These recommendations and analysis are for knowledge purpose only, if you are considering it for investment then kindly do your own research or consult with your investment advisor or visit equityboxx.

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Akshay Seth


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