Tuesday, November 24, 2009


Indian power sector: A growth story from 2003 to 2030
Key structural changes in the Indian power sector since 2003 include lower credit risk for asset owners and higher incentives for private sector participation. We believe these are likely to drive the long-term growth story in the sector. India is projected to have power generation capacity of ~750 GW by 2030, ~5x the current capacity, which is expected to be the third highest globally. This implies annual capacity addition of 20-25 GW against the average annual capacity addition of 5-6 GW in the Eleventh Plan so far.

Opportunities galore; key concerns continue to be an overhang
Opportunities in the power sector across various segments are immense and are likely to remain lucrative over the Eleventh and Twelfth plan periods. However, it is noteworthy that even after the Electricity Act 2003, some key issues persist in the sector. While policy actions of the central government and regulators have been in the right direction, implementation of those regulations, which rests upon state governments, has been found wanting. Further, due to the sector’s concurrent nature (implying it is under the purview of both Centre and states), the central government has been unable to implement reforms.

Introducing peak value: BTG, BoP to create most value till FY12E
We believe attractive opportunities exist across the power value chain. However, given the staggered expansion mode, these need to be analysed with regards to their risk profile and long-term potential. We introduce the concept of peak value creation (PVC) for such analysis. Peak value is created when the business maximises growth and RoCEs over the business cycle. We also note that market capitalisation tends to be a lead indicator. Our analysis highlights that all power equipment and contracting companies will enjoy PVC till FY12. Hence, upsides to valuation exist till FY12E, post which, valuations could de-rate as changing industry dynamics will result in lower value creation.

Top picks
Based on our analysis, we believe equipment and contracting companies and merchant power utilities are likely to reach peak value during FY10-12; regulated utilities will achieve their peak value over the next five years and competitively bid tariff companies are likely to reach peak value after FY12. Our top picks are Tata Power and CESC, amongst utilities. Amongst equipment and contracting companies, we like BHEL, BGR Energy, and KEC International.

To read the full report: POWER SECTOR