Shock of 2008 continues to haunt power stocks

Shares of power producing companies — once considered a potential growth engine of India — are yet to recover from the powerful shock of 2008.

For those who had invested in the likes of Adani Power, Tata Power, NTPC, NHPC, Jaiprakash Associates, Suzlon Energy, Reliance Power, Lanco Infratech, and GVK Power and Infrastructure at the peak of 2008, their investment capital could have taken a hit of 70-90 per cent.

Even Orient Green Power, which was listed in 2010, lost 75 per cent from its IPO price.

General economic slowdown at the global and domestic levels following the 2008 bubble burst, debts, legal tangles, fail to meet output target due to policy paralysis and fuel shortage, excess regulation and deteriorating financial condition of State Electricity Boards (SEB) are the main reasons affecting the sector.

Despite prolonged suffering, analysts do not see a sharp recovery anytime soon.

According to experts, the highly capital intensive power sector will see revenue inflows only after a long gestation period. Establishing a thermal power plant will take at least five years while for hydel projects it is 10 years.

HSBC, in a note said, most private generation companies in its coverage have been reporting losses on one or more projects and hence their debt levels have increased during the past one year.

“We do not expect a major respite for them in the coming years as the demand weakness from distribution companies continues,” HSBC said and added “We expect a bounce-back in earnings to continue for FY 2016-17 as some of the initiatives of the new government take shape. However, our earnings bounce-back assumptions are based on expectations of improvement in the macro environment as well as resolution of some of the regulatory uncertainty either by the government or by the regulators.”

Rupesh Sankhe of Reliance Securities said, the government has made a few meaningful structural developments such as SEB financial restructuring, revised case I-II bidding norms for PPAs and FSA obligation for Coal India, which are positives for the sector.

“Notably, the Power Index is trading at a 30 per cent discount to its last three-year average mean, which provides a margin of safety,” he added. NTPC and Tata Power are value picks while Adani Power and JSW Energy can be avoided, he added.

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