SSKI is extremely bullish on the power sector: “The huge power shortage in India is driving power utilities to aggressively add power capacity. Moreover, efficient manufacturers of power are moving towards merchant power plants as these plants offer unregulated returns. Also, the government is pushing for ultra mega power plants (UMPPs) for huge capacity additions at lower tariffs to consumers. Similarly, Power Grid Corporation of India (PGCIL) is driving expansion of inter-regional transmission capacity to improve regional connectivity of power through own and private participation.
We expect earnings of power utilities to register 13% CAGR over 2006-9, mainly driven by investments in higher generation capacity over the next 2-3 years.
In our view, despite the appreciation witnessed in stock prices over the past year, valuations are attractive and stocks have the potential to deliver 15-20% returns over the next one year.
We believe power utilities will witness explosive growth with their huge generation as also transmission capacity addition plans.
NTPC: NTPC, the largest power producer in India, is planning to double its capacity by 2011-12 through a mix of thermal, hydel and nuclear power plants. We expect NTPC to benefit from plant load factor-based incentives and Unscheduled Interchange Charges, which would enhance its RoE to 15-16% from a regulated 14%. The significant capacity addition and incentives for existing plants would drive 14% CAGR in NTPC’s earnings over 2006-9. We reiterate our ‘Outperformer’ rating on the stock with a target price of Rs 182 per share.
Tata Power: Tata Power is aggressively pursuing new growth opportunities across the power value chain. The company’s healthy balance sheet would enable it to implement the huge generating capacity addition plan. The existing distribution business continues to generate steady cash flows, which is expected to drive 8% CAGR in the company’s earnings over 2006-9. We have valued Tata Power on a sum-of-theparts (SOTP) basis at Rs 639 per share, using DCF valuation for the core distribution business. We maintain our ‘Outperformer’ rating on the stock.
Reliance Energy: Reliance Energy (REL)—a focused distribution company with steady cash flows from the Mumbai circle—is expanding its generation capacity to be entirely backward integrated. REL has also built a strong portfolio of infrastructure development assets such as roads, mass rapid transit system and transmission line projects.
REL’s strong balance sheet, coupled with cash of Rs 6,000 crore on books, can easily fund its new initiatives. We believe SOTP value of Rs 531 per share factors in near-term growth opportunities. ‘Neutral’.”
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