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Losses and Politics

Better realisations & higher generation result in higher revenue growth for the power sector, but complications will keep profitability mired in politics

In a power scarce country like ours, power producers have a vast opportunity in front of them. But power is a sensitive sector. Not many state governments like to raise tariffs in the fear of a political backlash. Agricultural consumers for example are touch-me-nots for the ruling class. Years of subsidized tariffs for this group has meant the other user of power - industry has had to shell out more while state electricity boards continue to bear most of the burden. This imbalance however may not sustain forever.

The nation’s power sector faces connectivity issues. The government wants such a situation to end with the ₹40,000 crore Deendayal Upadhyaya Gram Jyoti Yojana for the electricity needs of rural India. Another ₹30,000 crore is envisaged to be spent on transmission and distribution improvement.

The 19 listed power generation companies saw an average revenue growth of 13 per cent in the last four quarters. Much of the increase can be attributed to better realisations and higher generation. EBITDA margin too has improved as a result, from 37 per cent in the corresponding period of the previous year to 40 per cent in the latest four quarters. However, mounting losses have meant that of the 19 listed players, only nine reported a positive net earnings growth in the last four quarters.

Outlook
Power Grid Corporation has cleared a backlog of ₹1 lakh crore recently. Around 19 of the 29 state governments have undertaken a tariff hike – most ranging between 4–10 per cent. The government is working on resolving a number of issues that the sector is plagued with, including fuel shortages and high cost of imported coal, the funding of various projects, the reduction of losses and power theft in distribution. The sector may take a long time to turn around. The BSE Power Index has run up 43 per cent since the year’s lows in February 2014. Earnings growth has yet to catch up. Stay away.

Star performer of the sector
SJVN
SJVN is a PSU with a market cap of only ₹10,000 crore. This small-sized player is beating many industry biggies in the profit game. With only two major areas of operations - in Haryana and Maharashtra, SJVN reported a bottomline growth 61 per cent and topline of 55 per cent in first half of FY15. A low D/E ratio and higher margins set SJVN apart. At Rs. 23 per share, this profit-making company trades at book value.

Still waiting for power reforms

Company NameSales Growth YOY PAT Growth YoYTTM EPS (G) YoYTTM Ebitda margin (%)D/EROCE
(%)
NTPC16.01%-14.76%-14.76%24.540.9511.03
Power Grid10.08%0.83%-10.77%88.762.5610.7
Tata Power Company-3.98%-686.93%-614.98%20.022.948.36
NHPC20.80%-63.30%-59.24%64.980.747.52
SJVN48.12%42.20%42.20%97.090.2712.38