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Boosting the Power Sector

The Government has realised that there is acute shortage of power in the country and has taken steps to revitalise it because power is one infrastructure sector which is essential for growth...

The power situation in India is appalling and there is an urgent need to increase the power generation capacity and revive the sector says, Sunil Singhania, Head - Equities, Reliance Mutual Fund in this interview with Varun Chabba...

How diversified is the universe of Reliance Diversified Power Sector Fund? What sectors are selected when investing in this scheme?
Reliance Diversified Power Sector Fund aims to invest in various segments of the Indian power sector and 65 per cent of the fund’s corpus is invested in companies engaged in the power sector. Broadly, the power sector companies can be classified into those operating in the power generation, power transmission, power distribution, power trading, power equipment and power technology. It also includes companies engaged in renovation and modernisation of existing power plants, companies financing or funding power projects and emerging genres that will evolve as the Indian power sector develops.
So, if you see the portfolio of this fund, it is well diversified within the power sector and is not concentrated to few themes driving the sector.

What is your view on the power sector?
There is no doubt that power sector in India has got huge potential. There is severe power shortage, the demand is insatiable. In a way we are a power deficit nation. The impact of the shortage is visible with rising power costs, which has a trickle down effect on the other parts of the economy as well. Take for instance, the severe power shortage in the South; it is badly impacting all industries there. Several leading companies there have been impacted by low and erratic power or the availability of power at a high cost resulting in these companies posting poor results.
The power situation in the country is appalling and there is an urgent need to increase the power generation capacity. In 2003, the power sector benefited from excellent reforms and developmental programs which resulted in the necessary thrust to push the sector till 2008. However, in 2008 we experienced both internal and external turmoil, which resulted into difficulties in raising equity and debt. For an extremely cash-intensive sector like power, a lot rides on the mood of the economy, the cost of capital and the Government push. In the post 2008 scenario, this sector has faced several new hurdles including land acquisition, uninterrupted supply of raw material. This situation further complicated the precarious health of State Electricity Boards (SEB) that were unable to pay. All these factors have impacted the sector with debt being the underlying problem.

But, the Government has taken some steps to revive the sector...
Yes, the Government has realised that power is the one infrastructure sector without which we cannot grow. Few initiatives undertaken by the Government is already there to be seen. For instance, the SEBs have been forced to increase tariffs, unlike the time when they were forced to sell cheap electricity compared to the costs incurred to produce it. There has also been steps taken to restructure the SEB finances, which will bear results with time. Some of the other steps taken by the Government earlier this year such as fuel availability as far as coal is concerned was addressed by ensuring fuel security, which is so vital for the sector. So, the projects that were either already completed or in the process of being completed over the next few years are ensured with reasonable coal supply. As these moves were from the Prime Minister’s Office (PMO), it is a serious measure. So, these are all steps taken which will ensure that the much needed boost to the power sector comes through.

What are the other factors of concern for the sector?
Some of the issues include land acquisition, environment clearance issues, raw material linkages and non-clarity on gas. Gas continues to be an issue because of the low supply in the Indian market, with no definite answer to address the situation. On the funding part; most of the banks hit the ceiling depending on their defined lending limits. This could be addressed if the proposal to move some of the companies in the power sector to the infrastructure and finance companies, which would free up funding. However, we need something concrete and something that is long lasting. The good thing as I mentioned earlier, are the steps taken by the Government. Coming directly from the PMO, the initiatives are encouraging, which can be seen in the way some of the companies have started to function. So from a medium- to a long-term perspective we feel that this is a good sector that can give decent steady returns.

Read part 2 of the interview tomorrow where Sunil Singhania - Head Equities talks about what factors can affect the power sector and what should investors look for when investing in the sector.