Summary
Power is the key
input for industrial and economic development. As power can neither
be stored nor imported, investment in new capacity is the only way
to augment supply, which is a pre-requisite for sustaining
industrial growth.
Power utility sector
is dominated by the State. Barring 5 private sector licensees
catering to the cities of Mumbai, Ahmedabad, Surat and Calcutta,
and one state of Orissa where distribution of power has been
privatised, generation and distribution throughout the country is
controlled by State owned bodies.
India continues to
be a power starved nation, even after 50 years of planning and a
vast experience of putting up a 90,000mw generating capacity with
associated transmission and distribution systems. Power shortage
has resulted from low capital investment in the sector and
inefficient operations by the state controlled enterprises (read
high T&D losses and low plant utilisations resulting from
inadequate investments in Renovation & Modernisation). Our
energy shortage in FY99 was 5.9% all India, but the peak deficit
was high as 14%. Click here for state-wise energy shortages and peak shortages. According
to the latest estimates of Central Electricity Authority (CEA),
India needs an additional 1,00,000MW at an estimated investment of
nearly US$100bn to meet its power requirements in the next 15
years. Therefore, participation of private/foreign capital is
inevitable.
The government has
considerably liberalized the entry of new players and has assured
attractive returns on investment during the last few years.
However, actual capacity built has been hampered by the fact that
the ultimate buyer is the State Electricity Board, most of which
are financially bankrupt. Currently, from investors point of view,
only the licensees are listed on the stock exchange.
Earnings of
licensees are regulated and defensive irrespective of their
efficiency levels. Licensees are permitted to set tariffs in a
manner that they earn a reasonable rate of return on the capital
employed in power related assets. Any surplus profit is either to
be refunded to the consumers or kept as reserve to cushion any
future shortfall in the profitability. The earnings are highly
defensive and should rise at 15% pa in the normal course of
operations. In the event of any major capital expenditure, the
growth in earnings for existing shareholders will depend on the
modus operandi of raising funds. While debt funding will have no
impact on earnings, premium equity at a price higher than the book
value will accelerate earnings growth. Investment can be considered
for long term basis as the growth in utilities is slow but steady.
TEC and BSES offer the best exposure to this defensive
sector.
