Power stocks running ahead of structural reforms
Some power stocks have outperformed the Sensex, but investors should be cautious
The so-called Narendra Modi wave in the equity markets has swept up stocks of private power producers as well. Some of them have outperformed the Sensex, partly owing to attractive valuations and partly owing to expectations of better performance. But investors should be cautious. Power sector stocks have lit up previously only to be extinguished quickly.
Yes, there are some good tidings. State electricity board finances have reportedly improved following the adoption of a restructuring package. Coal availability has gone up as well. But these are not enough to signal a turnaround. Distribution companies are not buying enough power. There are no signs of a pre-election buying spike.
The net result is that capacity utilization levels have dropped to their lowest since 1998-99. Plant load factors for thermal power producers have sunk to 65.6%, adding to earnings stress. Capacity utilization is unlikely to pick up in a hurry. For one, a part of this is owing to non-availability of gas.
Second, demand has to pick up from distributors. For that to happen, there has to be a steady improvement in their finances. That, in turn, hinges on reduction in power theft and a hike in rates, which appears impossible at least until the election is over.
Yes, there is a buzz in the air about mergers and acquisitions. But as UBS points out, there are not enough buyers even if assets are available at distress sale prices. Even if such mergers or acquisitions materialize, they are unlikely to correct the structural problems in India’s power sector, a pre-requisite for a sustained stock rally.
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