True to their name, power stocks have delivered power-packed returns to investors.
Those invested in power stocks can certainly have a great end to their year. Take a look at the appreciation of some of the stocks. Even power equipment manufacturer BHEL has felt the impact. Meanwhile, fund scheme Reliance Diversified Power Sector delivered a fabulous 116.77 per cent one-year return (as on December 19, 2007). The sector is driven by tremendous demand which will not abate. And growth will not only be witnessed in power generation, but also power distribution, transmission, and equipment.
While the bullishness on this sector cannot be underplayed, the frenzied activity was only seen in the past few months. In fact, it coincidentally began in August around the time Reliance Power Ltd, a subsidiary of Reliance Energy, won the bidding for the Sasan Ultra Mega Power Project in Madhya Pradesh.
These ultra mega power projects (UMPP) were started by the government. Each project will have a minimum capacity of 4,000 MW and will meet the power needs of a number of states through transmission of power on regional and national grids. The government has announced nine UMPPs till date and they are allocated via a tariff-based, competitive bidding route. Tata Power has bagged the Mundra UMPP and ADAG Reliance Power Ltd has got the one at Sasan.
What is needed for such projects to be smoothly implemented is a sufficient and uninterrupted supply of coal from Coal India Ltd and its subsidiaries. The projects that give the bidder the right to mine coal does offer assurance but pure generation companies have no expertise in that area. Tata Power is relying on imported coal and has bought stakes in two Indonesian coal companies. Though it produces hydro-electric power, it's betting on coal-based thermal power as its mainstay for expansion.
Investors wanting to buy into such stocks right now could pause and reconsider. After all, valuations have hit the roof. These companies will have to turn in exceptional earnings over the next few years to justify them. "Stocks are not cheap and to buy them now is that much harder than it was a few years ago,” says Sunil Singhania, fund manager, Reliance Diversified Power Equity. Though these stocks have been on a roll, there has been no change in fundamentals and none of the stocks have been re-rated. What they have announced are ambitious capex plans that have added to the euphoria in the sector.
This article was originally published on February 08, 2008.
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