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Following announcement of the Ujwal Discom Assurance Yojana (UDAY) — a package announced by the government to improve the health of State electricity boards (SEBs) — power generation company stocks have received a fresh lease of life.
After being battered for years, stock prices of most private power producers, such as Adani Power, GVK Power and Infrastructure, GMR Infrastructure, Reliance Power and Reliance Infrastructure have gained between 2 per cent and 37 per cent since November 5. During the same period, S&P BSE Sensex was marginally down 0.6 per cent while BSE Utilities was up 4.6 per cent.
“Earlier, the players faced issues both on the raw materials and offtake fronts. While coal availability has improved, one hopes that the power distribution companies’ health problems will be resolved,” said UR Bhat, Managing Director at Dalton Capital Advisors (India).
In line results Also, the financial performance of major utility companies, including central public sector undertakings in the September quarter, was in line with analysts’ estimates, said Motilal Oswal in a report.
According to a market dealer, some institutional investors may be buying in the counters to push the stock prices high as their investments have been stuck at lower levels for a long time now. However, there are no positive changes in the fundamentals of the companies, he said.
Reliance Securities is hopeful of better demand prospects for the power sector given the policy environment, infrastructure spend, pick-up in manufacturing activity and better coal availability.
But it is negative on private utilities like Adani Power and JSW Power, which have higher dependence on merchant power due to lower demand from SEBs and lower open market purchases at high rates.
“We believe the merchant rates are expected to remain at current levels over FY16-17E, settling at levels of ₹3.7-4 a unit in FY17E and yielding return on equity of 15-17 per cent. We expect a substantial portion of the uncompleted capacity addition of the 12th Plan to be commissioned in FY16E and FY17E, resulting in a fall in demand for merchant power,” it said in a note.
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