Watt a turnaround. Indian Power Sector: How to analyse and pick the best stocks
From ‘battery critically low’ in the previous decade, the sector appears better charged now
"A little over a decade back, the Indian power sector looked like one of the most interesting investing opportunities. Expectations of high growth, huge power deficits and grand government plans for multiple ultra-mega power projects (UMPP) attracted large investments from Indian business houses and international private equity giants.
But then, the sector got short-circuited. Everything that could go wrong, went wrong — lower than forecast economic growth, overzealous bidding for projects, significant currency depreciation and higher interest rates that resulted in project costs going way out of budget, lack of fuel supplies, and discom issues. All combined, resulted in a massive outage in the sector for over a decade. Many projects ended up unviable and landed in bankruptcy courts. From its earlier peak in 2008, the BSE Power index was down by 60 per cent by January 2020 (prior to the Covid crash) compared to the Sensex rise of over 100 per cent.
However, post the Covid crash of March 2020, the sector has seen a significant turnaround. From Covid lows of 1331 the BSE Power Index is up 247 per cent as against Sensex gains of 120 per cent. The index even crossed its 2008 peak in August 2022. What has been driving this optimism in the sector? It can be attributed to many factors — supportive fiscal/monetary policies driving economic growth, shakeout in the sector resulting in strong players emerging stronger and weak ones getting weeded out."
It is a long article. I suppose as it relates to the power companies, it has a bearing on the Power Finance Companies too.
Can anyone help me fundamentally to figure out of PFC is fundamentally aligned to do well…I am a technical first investor and the charts are indicative of a big change
Half of private loan book is already in NPA and 70% is already provided. Recent recoveries/ restructuring are above 30%. Comparative to last 5 years, private power sector is in good shape. Not expecting any huge surprise NPAs
I am not expecting loan book to growth rate beyond 10%. Even if loan book stagnant, it’s ok. Because that increases the disposable profit which inturn increases dividend amount.
My biggest fear on this is spread compression due to interest rate cycle and state govt financial position. If I check history, they are able to maintain spread in both interest rate upcycle and downcycle. But many state government finances are in bad shape, if central govt intervenes and ask these twin to lend further loan at same interest rate. If spread drops by 100 bps, atleast 30% of PAT will be gone and while perception of cheap will go for toss
How do one conclude that it has been always cheap ? PFC was trading consistently above 0.8 time book since its IPO listing till 2018 which was cheap. Now if it is trading at 0.4 in 2022, it is considered double cheap. so even if PFC reaches from double cheap to cheap, it gives 100% return.
Relative cheapness in PFC. My primary bet is on REC which I bought year back. I bought PFC recently with the money which I originally intended to top-up REC.
Reason for my primary bet on REC: If you go into minor financial level details like yield, cof, spread, nim, NPAs, ROE, loan growth, you can find REC have minor advantage in all parameters. And also since PFC has its stake in REC, any company level asset quality issue in either PFC or REC will affect PFC, but REC is ring fenced from PFC.
But all these are minor details and in current times, asset quality is not a concern, so I used topup money to buy PFC due to its relative cheapness.
Fundamentally it is still cheap. price to book of 0.54, p/e of 2.93!! consistent roe of 17-21 perc, dividend of 7.8 perc!! If thats not cheap what is? At its low of around 100 it was a steal, now its cheap.
Can the technically oriented people on this forum, if any, comment on how much impact a company’s inclusion in a major index like Nifty50 likely to have on the incremental buying that must be done by the index ETFs for the new entrant and what impact is it likely to have on the stock price? I ask this because it seems to me that that as of Jan23, the least market cap companies in Nifty50 have market cap ~54,000 crores so if PFC reaches a market cap of ~55,000 crores (corresponding to a PE of only ~3 and PB of only about 0.72) then its likely to be included in the Nifty50 index. Given that the market cap is ~42,000 crores as of this writing and the low PE and PB prevailing currently, it seems quite plausible that there is some relatively small PE or PB improvement that could result in PFC entering the Nifty50 index.
Nifty 50 directly seems a bit of stretch. While the least market cap stock is 54k, I believe a new entrant will be atleast 70k.
But at the same time, PFC should enter the Nifty NExt 50 club, that should be the base for it to enter nifty 50 eventually.
Ok, thanks. I hadn’t realized that for entry the market cap has to be 1.5 times the market cap of the smallest company on the index. At current prices, PGC looks more like a candidate for inclusion into Nifty 100/Nifty Next 50 index.
There is no rule as such on market cap that I am aware of, but in general, the new entrant is significantly higher than the lowest market cap company. The one thing I believe which can be in advantage of PFC for Nifty inclusion eventually if that happens would be that it is the market leader in Power Financing.
PSUs are all about entering early and exiting early.
The above point is applicable wherever the market is competitive with private players. For eg: the rule doesn’t apply to defence sector
Every year has a theme. Post covid, IT lasted for a year, then came PSU banks. If my understanding is correct, this year will belong to Power & Construction/Infrastructure.
Disclaimer: Invested from lower levels | May exit anytime
Its inexpensive yes
On the other hand its touching 52 week high, and not too far from all time high…around 180 in 2010
None of this matters because it has consistently grown its EPS since then, every single year
Let’s revisit this discussion from June 2020. To @smallcapvaluefind analysis of PFC, everyone here was quoting it’s a value trap without understanding the real meaning of value trap (on value pickr at that!!)
Most of us were saying value trap for it because the stock was not moving and now see where it is!! But the fact is that if you just ignore the stock and see the fundamentals, you see a company with a historical 10 year ROE of 16-21 percent which has 5xed its profits in 10 years!! Such a company cant be value trap. A value trap is a company with good looking financials but no growth (or degrowth), which cant make use of the money it earns (might end up being used in things necessary to keep company running!!) and doesn’t give it as dividends either!! Not a company that is doing both, giving dividends and growing its profits!!
The fact is that it was never a value trap at all!! Even those who were stuck in it as a value trap were making 8 percent cagr+ due to dividend alone!! How is that a value trap? And it was also growing fundamentally
Sometimes we miss the obvious growth happening fundamentally because we are stuck seeing a cyclical stock price chart!!
I think its the PSU overhang why many of us missed the bus on this one and even banks. Its more like ‘PSU discount’ rather than ‘value trap’, because these stocks have always sold at a discount to private players, and even today its no different. At what price a private replica of PFC will sell?
It can also be called ‘PSU bias’, we think its normal for a great company to sell at a discount because its a PSU.
But those concerns are legitimate for many of us, no matter how well a PSU does, the government overhang is a reality.
Even at 270, PFC sells at below one price to book. Will be nice to know how many of us are willing to buy it today.
