Saturday, December 12, 2009

Why I will invest in Power Stocks?

Energy and Power security plays very important role in international politics let alone its importance to India’s growth. In fact it was one of the important reasons for the recent Iraq invasions and is widely and openly accepted as well. Stephen Leeb, Author of the Book “The coming economic collapse: How you can thrive when the oil costs $200 a barrel” predicted few things that turned out to be true during the recent economic collapse but more unnerving thing is yet to come. He says that the energy resources are reasonably adequate at this point of time, but it is going to be a scarce commodity in the near future and the countries will fight each other to get the share. Advanced countries with more muscle power will win that war eventually. But to be considered as an “Advanced country” India needs to produce at least 15 times of what they produce right now. In this context I feel private sector has a huge opportunity to cash in the demand.


Major Players
Majority of the India’s power generation is controlled by public sector undertakings notably National Thermal Power Corporation (NTPC), National Hydroelectric Power Corporation (NHPC) and Nuclear Power Corporation of India (NPCI). But there are number of private players like Tata Power, Reliance Infrastructure, CESC, Torrent Power and Jindal Power. Few other companies like Adani Power, Reliance Power and Indiabulls Power have generated huge amount of money through IPO Route recently to setup power plants with ambitious projection capacities and I do think there might be few more players joining the club.




Numbers Game
Usually the power sufficiency is understood by per capita usage and India is way behind the other leading economies. Canada leads the nations with the per capita power consumption of around 17500 Kilowatt Hrs followed by USA (13500 KWh), Australia (11500 KWh), Japan (8500 KWh), France (8000 KWh), Germany (7500 KWh), UK (6500 KWh), Russia (6000 KWh) and Italy (5800 KWh) while India’s per capita stands at mere 620 KWh. Even among the so called BRIC countries (BRAZIL, RUSSIA, INDIA, CHINA), India’s position in terms of power production and usage is last. Power consumption is so unequal within the country that Gujarat’s per capita is 1300 KWh while the per capita for Bihar is 90 KWh. So in that sense, India needs to catch up with other countries in order to meet the power requirement for her industrial growth and economic prosperity. Residential consumption is also so low that more than 40% of rural households do not have access to electricity and even for the population, who does have access, power cuts are very common and that’s how India is remembered in western countries.

India currently has the installed capacity of 147,000 MW, out of which 93500 MW comes from thermal power plants and the remaining capacity from Hydro Power (36500 MW), Renewable Power (13000 MW) and Nuclear Power (4000 MW). But this demand is going to increase by 10, 00,000 MW by 2030 according to many projections and the government has in fact already planned to increase the installed capacity by 80000 MW by 2012. The government has also set some ambitious plans like 20000 MW solar power and 30000 MW Nuclear Power by 2020 and it is different matter whether it will be executed as planned or not, but at least they do understand the importance of power generation and are taking some steps towards that direction. Wind power is the major renewable power source and that’s where wind turbine manufacturers like Suzlon Energy has a huge role to play and the stock price for that particular company has been staying in expectation of that. Of course the stock price plummeted in recent times due to huge debt, but in the long term, Suzlon will come out of it for sure. Even companies like Elecon Engineering who produces parts and accessories will do well in the future.

Market Players

Tata Power is the largest private power producer in the country and they produce only 2700 MW. Others such as CESC, Reliance Infrastructure and Torrent Power produce less than 1000 MW each and that’s precisely the reason Reliance Power and Adani Power has ambitious plans to generate more than 20000 MW each by 2020. Realizing the opportunity in the power sector, players like Indiabulls who does not even have any background or past reputation in the power business have entered the market. So, looking at all these facts and figures, I strongly believe that Power Sector Stocks will give excellent returns over the long term as the gestation period for power investments is significantly lengthy. Even companies associated with power sector like Power Grid, Power Trading Corporation, Rural Electrification Corporation, Elecon Engineering and GVK power will stand to gain.

List of Power Sector Stocks

I am just giving here list of potential companies in this sector, but there are lot of other associated companies like Bharat Bijlee, EMCO and Transformers and Rectifiers which I am not listing here to keep this article short.
NTPC
NHPC
TATA POWER
CESC
RELIANCE INFRASTRUCTURE
RELIANCE POWER
ADANI POWER
TORRENT POWER
NEYVELI LIGNITE CORPORATION
CROMPTION GREAVES
ELECON ENGINEERING
POWERGRID CORPORATION
POWER TRADING CORPORATION
RURAL ELECTRIFICATION CORPORATION
JINDAL POWER (IPO)
GVK POWER AND INFRASTRUCTURE
INDOWIND ENERGY
Kumaran Seenivasan

6 comments:

Nannu,  December 12, 2009 at 6:52 AM  

Kumaran,

Very good post. I am awed by the way you collect information. Please could you throw some light from where do you get such valuable information.

Regards,
Nannu

Shabu's December 13, 2009 at 9:08 AM  

Dear Kumaran,

Nice and informative post on Power sector with adequate statistics. I can measure the hardwork and required research for such an excellent article on the unavoidable sector like power. I am focussing on companies who involved with eternal and cheaper resources like Solar, Wind & Wave energy . Thanks for the list of stocks and keep it up...

regards
Shabu Thachat

Niranjan Kumar December 15, 2009 at 5:34 AM  

I think power sector stocks are good till the time until the time of competition comes.

Will the power sector become like telecom stocks which got hammered down due to intense competition?

Your opinion, please.

Kumaran December 15, 2009 at 7:22 AM  

Niranjan,

In terms of out and out technology stocks like Telecom, technology changes day by day and it brings the cost down or up depending on the situation. Thats why you see this ugly price war and the stocks het hammered. But I do not see that happening in Power Stocks. It's very hard to invest new way to produce power. We can only improve on the performance of existing methods.So, it will not get the same kind of beating.

-Kumaran.

roshan December 23, 2009 at 3:52 AM  

Once again thank you very much for the article. I too feel, power sector will outperform the market for the next few months.

suvro March 7, 2010 at 12:30 PM  

everybody is talking about Power to be the next telecom.But at current high valuation of these power stocks coupled with huge debts they have and complex projects in hand where some are gas based, some thermal,some coal etc..what do you think of these sector in next five years where world is moving towards alternate energy and more into gas based. Pls specify the risks involved and good picks at current valuation

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