SMARTPROFIT: STRONG GROWTH IN POWER SECTOR

[smartprofit consultancy]

Budget 2012 have levered strong growth for power sector by proposing
numerous
policies in their favor. Giving relief to power producers, FM
Mr.Pranab Mukherjee
granted them duty-free imports of coal and LNG, extended tax breaks
for new projects
and allowed power projects to retire part of their rupee debt and
replace it with foreign
borrowing, which is much cheaper even after hedging costs. This would
also increase the
ability of domestic banks to lend to the sector without exceeding
their exposure limits.
Progressive measures, like increasing the tax-free bond limit for
power sector, reduction
of withholding tax from 20% to 5%, exemption on customs duties for
import of thermal
fuels for power plants, will go a long way in reducing financial
burden, which will
benefit both the suppliers as well as the consumers of power. The
sector has also been
allowed enhanced depreciation on selected items.
With FM Mr.Pranab Mukherjee reviving hopes for power, it is
undoubtedly one of the
most promising sectors to look forward to .We recommend our best picks
from power
sector for long term investment.
NEYVELI LIGNITE CORPORATION (513683)
Current: 86;
Target: 120 in 4 months
NLC is a government-owned power generating company having its own
lignite mining
company. It is recently announced as “Navratna” by Government of India
in April 2011.
NLC spreads over an area of around 54 square km, comprising Neyveli
Township and
temporary colonies around 32 blocks. The company runs the biggest open-
pit lignite
mines in India and mines around 2.4 Crore tonnes of lignite annually
for fuel, with an
installed capacity of 2490 MW of electricity per annum.
Neyveli Lignite Corporation reported a net profit of Rs 184.94 Crore
in the October-
December quarter of FY12, a growth of 92.5% as compared to Rs 96.07
Crore in a year
ago quarter.Net sales rose 20.3% to Rs 1,045.99 Crore from Rs 869.21
crore year-onyear.
The Company has 50% joint venture with Tamil Nadu Electricity Board
and it’s
announced its plans to invest about Rs.36, 900 Crore on power
generations and mining
capacity augmentation by 2017. The plan also includes development of
power projects
using other fuel feed. The company is also planning to invest Rs.
40,200 Crore to build
power plants in Tamil Nadu, Rajasthan and Uttar Pradesh. Strong
expansion &
diversification plans to explore coal-based, wind and solar power
generation projects will
add on strength to the cashbook. The coal priced has risen, due to
which Central Govt.
has forced SEB to increase Electricity Power tariff by 25-30%. This
will directly benefit
NLC for ownership of their mines.
We recommend ‘BUY’ on the stock at CMP Rs. 86 with a target price of
Rs. 120 in 4
months
RURAL ELECTRIFICATION CORPORATION (REC)
(532955)
Current: 218;
Target: 250 in 4 months
Rural Electrification Corporation Limited (REC), a NAVRATNA Central
Public Sector
Enterprise under Ministry of Power, with a net worth of Rs. 12,789
Crore, has main
objective to finance and promote rural electrification projects all
over the country. It
provides financial assistance to State Electricity Boards, State
Government Departments
and Rural Electric Cooperatives for rural electrification projects as
are sponsored by
them.
Rural Electrification Corp's (RECL) 3QFY12 PAT grew 16% YoY and 24%
QoQ to INR
770 Crore (15% higher than estimates), helped by a forex gain of Rs.
86.6 Crore. Loan
growth remained healthy at 25%.
With Government’s increasing emphasis on power sector Disbursements of
short term
loans increased sharply to INR 1150 Crore from INR 630 crore in
2QFY12. RECL
started disbursing short term loans to SEBs subject to fulfillment of
certain pre-requisite
conditions such as 1) tariff hike 2) government guarantee 3) proof of
filing of tariff hike
petition etc, which reduces the risk on incremental lending done to
SEBs. The share of
foreign currency borrowings has been steadily increasing which also
has helped RECL to
keep its cost of funds under check.
With a strong sanction in pipeline, healthy loan growth at 25%, we
expect earnings
CAGR of at 20% and ROE of 25% as REC leverages capital.
We recommend a BUY at CMP Rs.225 setting target of Rs 218 in 4 months.
NATIONAL HYDRO POWER CORPORATION (533098)
CMP: 20;
Target: 35 in 6 months.
National Hydro Power Corporation, an entity of Government of India, is
country’s largest
hydro power producer. NHPC is currently having an installed capacity
of more than
5,300 MW with 14 operational power stations and has a cash surplus of
over Rs.4,000
crore. National Hydroelectric Power Corporation (NHPC) has reported a
net profit of Rs
966 crore in the second quarter of FY12, a growth of 40% as compared
to Rs 690 crore in
the corresponding quarter of last fiscal. The state-run major is
engaged in the construction
of 10 projects at various locations in the country, going to have an
additional capacity of
4,502 MW. It is planning to develop two hydro projects in Myanmar. It
plans to increase
the capacity to over 10,000 MW by end of 2012.The coal price has
risen, which will
force to increase in power price by 25-30%. This will further boost
the profit margin of
NHPC to a large extent. Spanning on Government increasing emphasis on
hydro power
and NHPC strong hold,
We recommend a BUY on NHPC at CMP of Rs 20, with a target of Rs.35 in
6 months.
ALSTOM T & D INDIA (AREVA T & D) (522275)
CMP: 188;
Target: 250 in 4 months.
Alstom T & D India, formerly Areva T & D, the Indian subsidiary of
AREVA France
SA, engages in the design and manufacture of equipment, systems, and
services for
transmission and distribution of electricity in India.
With a view of expansion, eight new factories were built at three
locations: Vadodora in
Gujarat, Hosur and Padappai in Tamilnadu.
Areva T&D India wins contract for 765 kV Extra High Voltage Substation
from
Rajasthan Raja Vidyut Prasaran Nigam Ltd (RRVPNL) worth close to Rs.
400 Crore, the
stock is currently trading at lower valuations that contradict the
fundamental.
On 4th Oct, 2011, Government has enforce 14% Import duty on Power
Generation &
Distribution Equipment which will directly benefit to Areva T&D
Building on the strong operating performance with relatively low
interest and
depreciation cost as proportion to sales and lower tax incidence, we
expect company to
register CAGR of 13.5% respectively. We expect the stock perform
dominant in earning
at CMP Rs. 188 with a target price of Rs.250 in 4 months.
DISCLAIMER: - Smart Profit has taken due care and caution in
compilation of data for its reports.
The market view and investment tips expressed on Smart Profit are in
no way a guarantee either express or
implied. However, Smart Profit does not guarantee the accuracy,
adequacy or completeness of any
information and is not responsible for any errors or omissions or for
the results obtained from the use of
such information. CEO, Directors and staff may have a position in the
recommended stock.
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