Deepak Shenoy

India is Thirsty for Energy: Will the Bulls Take Notice?

Power stocks have had their runups recently, with P/Es going over the roof. Two big recent IPOs have whetted demand - Rural Electrification Corporation (which is a utility financier of sorts) and Reliance Power (which has projects for 28,000 MW production by 2015) RPower isn't doing all that great on the bourses, with all the drama around it, but at current prices it's still quite expensive.

Other listed stocks are Reliance Energy, Cairn Energy, Tata Power, GVK Power, JP Hydro, Suzlon Energy, Areva T&D, and NTPC. NTPC is the biggest player - 27,000 MW of power today - and is at a reasonable P/E of 23, most of hte rest are 30+.

There are power finance and trading companies like PTC and PFC, equipment manufacturers like BHEL, BEML, Siemens, Ing Rand, Bharat Forge etc.

Suzlon, Areva and JP Hydro are clean energy vehicles, and wind energy already gets a 150% depreciation benefit in tax (A huge number of windmills, owned by private parties and operated by Suzlon, have come up to take advantage of this law)

Apart from this there's Moser Baer who are getting into solar cell manufacturing. That's another huge business, and has tax and other benefits attached (homes with solar get a discount on their regular electricity bill etc)

With India's large local gas finds there isn't too much of a problem with supply, and in the next few years there is likely to be a huge surge in power production.

Now for the power plants, there are PPAs in place but given the populist politics there is also significant counterparty risk. (Remember in the Enron plant, the Maharashtra govt. just refused to honour the PPA) This should change with more home grown players who know how to work the government.

India will soon get a regulated energy trading exchange (restricted to only producers and utilities). That will alter the landscape but will take time.

This field is overpopulated and is prone to oversupply (a very good thing for consumers). Unless the grid stretches out to those that need it, reduce T&D losses (there is nearly NO research in India, and no player is funding research either) and contain theft, the supply may only benefit urban consumers. That means huge competition for cities and no benefit to the rural folks who really need it. I hope the coming recession will draw focus to such issues.