Power shares outlook strong despite weak Reliance Power debut

[K.Karthik Raja]

Power shrs outlook strong despite weak Reliance Power debut

MUMBAI - Reliance Power Ltd's disappointing debut on bourses today
hit other power shares too but market watchers continue to maintain a
positive long-term outlook on the sector.
Analysts are not perturbed by the fall in share prices of most
companies in the sector and are of the view performance will be
company-specific, based on the management quality, sustainability of
earnings, and growth plans.
Reliance Power share ended its first day on National Stock
Exchange at 372.30 rupees, down over 17% from the issue price of 450
rupees.
Bombay Stock Exchange's Power Index today fell 8.6% and was the
biggest loser among sector indices. The index fell more than the 5%
fall in BSE's Sensex and National Stock Exchange's Nifty.
The panic is overdone. If we consider investment in the sector and
the correction that the sector has seen since market started falling
in January, valuations look very attractive,Valuations of most power
companies look attractive as the price-to-earnings multiple of the
sector has fallen to 12-14 from 20-22 when key indices were at their
respective highs in early January.
They have reached the levels at which they were trading about six
months back, so it can be seen as a good time for buying.
Shares of power companies had soared after Reliance Energy
announced in October it would hive off Reliance Power and hit the
capital market with its initial public offer.
Power companies were being re-rated due to the embedded value of
their subsidiaries and special purpose vehicles based on Reliance
Power valuation. Outlook on these companies continue to be positive
over long term. Most analysts are bullish on the power sector,
primarily driven by the government's plan to add over 78,000MW for an
investment of $250 bln (9.9 trln rupees), of power generation capacity
in the five-year plan ending 2011-12.
Growth opportunity for these companies is high given the
government's thrust on public-private partnership for power projects,

TOP PICKS

Considering the growth potential of the sector, key drivers for
power
companies will be their ability to finance their projects, execute
plans on schedule, and secure fuel linkages.
NTPC Ltd and Tata Power Co Ltd emerge as the favourite pick in
this sector.Companies with firm fuel linkages and finance tie-ups are
fundamentally stronger than others. NTPC aims to raise its capacity to
about 50,000MW by adding 22,600MW during the ongoing 11th five-year
plan. NTPC is looking very attractive right now and it is a good time
to buy. It can rise to 300-400 rupees (per share) in one year
NTPC today fell 6.8% to 189.55 rupees.
Tata Power that is executing a 4,000MW ultra mega power project at
Mundra has picked up 30% stake in two Indonesian mines to ensure coal
supply to run its thermal power projects.
Shares of Tata Power today ended at 1,180.85 rupees, down 11.5%
from Friday. valuations of Reliance Energy that holds 45% stake in
Reliance Power also look attractive despite the dismal performance of
the latter on bourses.
This sector is not for traders, it is for investors with
fundamental
calls with at least six months to one-year horizon. Investment in
shares of power companies can give 20% returns over a one-year
horizon.

CONCERNS
In the short term, volatility in shares of Reliance Power is
likely to be
reflected in shares of power companies.
Reliance Power shares are likely to be volatile over the next few
sessions and investors are likely to watch it closely before taking a
position. Fall in the shares of Reliance Power today were mainly due
to expensive valuations.
For a company that does not have any operational capacity, an
issue price of 450 rupees was steep.
Valuation of about 300 rupees would be more reasonable for
Reliance Power. Reliance Power plans to set up a power generation
capacity of over 28,000MW over eight to 10 years.
Another concern for shares of power companies will be that
although valuations look attractive, institutional funds, particularly
those from foreign, may not buy these shares and may opt for sectors
with higher returns.

Negative sentiments in the share market have lead to a slowdown in
foreign institutional buying in the market and shares of power sector
are likely to be impacted by the slowdown more than most other
sectors.
Being a regulated sector with fixed returns, short-term gains in
the
sector are not very attractive.