The power sector has seen private players ever since it was opened with Tata, Reliance, Adani, Torrent and others being active participants. This was not possible earlier, today, private companies are installing 5,000-10,000 MW power plants which a decade ago would have been only a distant dream...
The sector is predominantly PSU driven. Does it not make stock selection difficult in the fund you manage?
You need to view this in the context of the huge capital required in this sector. India was, and is a capital deficit nation. So, any sector which requires a lot of capital has historically been launched by the Government; roads, railways and power have higher PSU participation or only PSU participation. This trend is not unique to India and can be seen everywhere else globally. With maturity and over time, sectors are opened to private players. We saw the opening of the telecom sector and the financial services. The power sector has also seen private players ever since it was opened with Tata, Reliance, Adani, Torrent and others being active participants. This was not possible earlier, today, private companies are installing 5,000-10,000 MW power plants which a decade ago would have been only a distant dream.
The composition of the sector is slowly changing and evolving into a mix of PSUs and private players. This augurs well for the fund as we have access to a diverse set of companies to invest in without compromising on the underlying power sector theme.
Considering the sector is very much dependent on government and long-term gestation; what should investors look for when investing in power?
Long-term gestation is true for every capital intensive sector and the Government push is needed to clear the impediments. I would say that the prospects are immense in the power generation space, but it needs the support of the Government to succeed. Thus, a lot will depend on individual companies and how efficiently they create and increase capacities and policies they adopt.
For investors; this is one sector where huge sums of money can be invested with a very clear expectation of earnings over long periods of time. Even globally, the scenario is similar for investors looking for investing in the power sector, which qualify as utilities which are suitable for investment with a 5- to 10-year time frame.
How sensitive is the sector to potential spikes in oil prices?
I don’t think oil has any direct relation to the sector, except when oil prices move up, coal prices usually follow. The indirect correlation impacts companies that are dependent on international coal prices. But one should notice that even though oil prices have been more or less stagnant over the past one year, coal prices have reacted by 30-40 per cent.
The past few years have not favoured Reliance Diversified Power Sector fund. Why should investors invest in it?
The past 3-4 years have been challenging. But, if you view it over a 6-7 year perspective; the fund has scaled close to 6 times. So investors who invested with a long-term outlook have made more money than many of the other diversified equity funds. But, if you compare the fund from its peak till now, the results have not been that good. This is the investment risk of this fund and is linked to its business cycle.
From our perspective, we feel that the fund’s portfolio is all right with a few good companies and a mix of companies from the sector. What could trigger the upside will be the lowering of interest rates. The lowering of rates, will benefit all capital intensive sectors. So, our fund is well placed in the short run, but as I mentioned earlier, investors who are investing in a sector like power should have a long-term investment horizon. If you look at long periods, the growth opportunity in the power sector is immense considering the capacity demand. So we remain quite enthused and probably it is a good time for investors to take a re-look at the sector.
To read Part 1 of this interview, Click here.