Overview
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:90;
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-on-year.
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. 90 with a target price of Rs. 120 in 4 months
RURAL ELECTRIFICATION CORPORATION (REC) (532955)
Current: 228;
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.228 of Rs 250 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 a target of Rs.35 in 6 months.
ALSTOM T & D INDIA (AREVA T & D) (522275)
CMP: 182;
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.182 with a target price of Rs.250 in 4 months.
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