Power stocks to continue their underperformance in 2012

The power sector is probably the best example of how sentiments change dramatically in the markets. It is also the best case study as  to why investors should pay greater attention to the fundamental values of companies.

The Power index attained a 3-year CAGR of about 56% in 2007, but has now taken serious beatings. The domestic issues alone have been enough to bring the power stocks down by more than 44% in the last 2 years. In fact, in the year 2010, when the Sensex gained about 17%, the Power index lost about 7% in value. In 2011, when various issues like the European debt crisis, high interest rates, inflation etc. haunted the stock market, the Sensex has lost 24% in value against the Power index, which was down by more than 40%.

Power companies have been suffering various problems like coal unavailability, low power tariffs, delay in projects, higher fuel prices, environment and land clearance issues, etc. Beside these are issues related with increasing T&D losses and poor financial health of the state electricity boards, and these are here to stay unless some courageous steps are taken by the govt.

We, at DSIJ, have compared 14 companies from the Power sector, and except for Powergrid Corporation, no other company has yielded a positive result for 2011. In fact, none of these 14 stocks have turned out to be profitable for investors for the last 2 years, which can be seen from the fact that 7 out of 13 stocks are down by over 50%.

Here is a quick review of a select few stocks that are listed in the table below:

• Lanco Infra is heavily down by over 85% in this year alone. The company is facing challenges over fuel supplies and power offtake agreement. Its debt of over 18k crore is also a concern in the current high interest regime.

• GVK Power, Reliance Infra and GMR Infra have also been beaten up on the bourses by over 70% each. GVK Power is facing fuel challenges due to decreasing gas production in the KG-D6 basin, while GMR Infra is facing a debt of over 20k crore as well as fuel security issues.

• Tata Power is facing hurdles in its Mundra project, for which it is demanding revision of power tariff. The Mundra Ultra Mega Power Plant will be the first UMPP to be commissioned in the country. However, we do not see any favourable impact on revenues at the moment. Investors must keep a watch on the stock for some positive signs.

• NHPC is facing challenges over land acquisition in the north-eastern states. The company has many hydro projects in the pipeline. The stock is down by over 49% in the last 2 years.

• Adani Power, which was a star performer in 2010 due to improved project execution, has lost 51% in this year alone over the issue of imported coal.

• Reliance Power has many projects in the pipeline, but its operating capacity is 900 MW, which has been reflected in its yearly performance on the stock exchange. We are not bullish on the stock at the moment.

• JSW Energy has many projects in the pipeline, but sentiments on the stock are not positive due to the merchant power agreements as well as the issue of imported coal.

• Torrent Power has exposure to merchant power agreements, which have already slowed down in terms of tariff. We are also afraid that the scope of reducing the T&D losses in the Bhiwandi franchise would remain limited.

• Powergrid Corporation, which somehow held fort in 2011, would be the only stock to watch. The company has reserved a whopping 1 lakh crore for capex over the next 5 years, which will drive its growth. Beside, the new projects that will get commissioned are expected to have good impact on its business.

In 2012, the same problems will keep haunting the sector, which would be challenging for the companies. We may also see a few companies raising funds through the initial public offering (IPO) route. Investors should remain aware of the market conditions and be stock-specific, rather than relying on the sector itself.

Performance Of Select Few Companies