Loading...

Follow Arun the Stock Guru on Feedspot

Continue with Google
Continue with Facebook
or

Valid

Power sector broadly can be categorised into four segments starting with companies like BHEL which constructs power plants. The valuations of these kind of companies depend on their order books/capex cycle. Then comes the power generation companies such as NTPC and JSW Energy for whom profitability primarily depends on utilization given for PPAs. One major advantage for such companies now is that coal prices are getting passed on which wasn’t the case earlier. Third segment consists of the grids such as Power Grids of the world which are like the nodal distributors from state to state. Last segment belongs to guys like Tata, CESC and Adani (earlier Reliance Energy) which manage last mile distribution. It would be prudent to note that the Grids get a stable ROE kind of return however the last mile guys basically get an upside on volume growth.

Basic Thesis: It takes 3-4 years to set up a new power plant. Demand has been growing steadily at 7-8% a year, which is in line with real GDP growth. Capacity addition was growing at around ~15% for 3 years in a row i.e. FY11 to FY13 that lead to overcapacity and supply glut. Post that supply addition over the past 6 years has slowed to 2-3% so utilizations are inching higher for power generation companies.

PSU companies get preference in PPAs hence the PLF for them would always be higher than that of their private counterparts and on an average would be close to 80%. Which is why PSU generation companies have higher utilization rates. Let us consider a simple back of the envelope 3 year thesis on any operational power generation private company assuming PLF at 60% and no increase in tarrifs. So revenues and EBITDA can go up by 50% for private sector power companies on the exact same capacities with interest and depreciation either reducing or remaining constant. So JSW Energy for example by FY21 sees revenues at ~13500cr and EBITDA at ~4000cr minimum. Interest @800cr given debt repayment schedule and constant depreciation @1100cr giving a PBT of ~2100cr and PAT of ~1500cr. If valued at ~7x EBITDA, marketcap automatically doubles. That's the broad thesis for all such companies in the Power Sector. The same model can be applied to any power generation company.

First to benefit will be the power generation companies over the next 2-3 years. Post which next round of capex starts then it will be guys like BHEL which benefit. For distribution and grid companies it will be business as usual with steady growth. As in no earnings inflection. They should see steady 6-8% growth on existing assets. New assets of course will come in at a 14-16% ROE.

As a thumb rule for thermal power generation plants it costs 4.5-5cr for each MW capacity. So a 1GW plant will have a capex of 4500-6000crs. So if you notice a capex of say 7500-8000cr per GW just understand that it is capex gold plating. Interesting choice if asked to name, could be Gujarat industrial Power Ltd. Company with 800MW is quoting at around 1700crs Enterprise Value. Replacement cost of assets would be like 4000-5000crs. So in good times we might see a much higher valuation as the capacity gets utilised. As it is a PSU we can assume there are no management concerns. In the private segment, Jindal Steel and Power or JSW Energy may offer higher upside because of higher leverage.

Empirical evidence shows us, barring the commodities, no sector which created wealth in the previous bull cycle got repeated in the later bull markets. Power as a sector in living memory hardly created any wealth over the past 15-18 years. Let alone creating wealth, they have been wealth destroyers. Most of the companies are quoting at a huge discount to their replacement costs of assets. They are severely under owned and hated bets. But things are changing operationally for sure. The next 5 years can well belong to some of these quality stocks. Few of the companies even come with highly attractive dividend yields which protects their downsides. Valuations look pretty attractive and with clear signs of early tailwinds we should definitely watch out for some of these power stocks.

Btw : Happy to introduce our Sebi registered investment advisory services. Please click the below link to know more about it.
tinyurl.com/y62ttkjo
Read Full Article
  • Show original
  • .
  • Share
  • .
  • Favorite
  • .
  • Email
  • .
  • Add Tags 
Our upcoming Annual meet in Mumbai this April:-

As you all know,every year we conduct our Investor groups yearly meet once in a year where for couple of days the shortlisted participants meet and greet each other,network and discuss everything related to equity markets. In the last yearly meet which happened during October in Pune,these were the stuff which happened and got discussed.

1) HEG-Graphite why the party is over and you should sell: Was presented by someone who personally is a shrewed investor and a supplier to both the companies.

2) Indian tile companies: What’s the ground reality? 

3) How to research a Pharma stock: Somone who manages the European portfolio of the Billion Usd Intas Pharma presented on it.

4) Behavioral economics and Indigo: Was presented by someone who has been CFO of 5 big listed companies.

5) Indian Shark Tank: Where a small time unlisted beverage cum snacks player presented and all the 60 participants grilled it. 

6) How a PE/VC zeroes in on a listed company: Someone who manages a VC fund and recently raised 100crs,presented on it.

7) All the 60 participants chipped in with their small cap ideas with logic and rationality.

8) How to play the Auto Ancilary stocks: Was presented by someone who happens to be asupplier to all listed auto companies. 

9) All the yearly group participants are kept in a separate whatsapp group where it’s like an extended family. Whole day discussion happen pertaining to different aspects of market.

10) The total event is of 22 hours. Crazy epic learning. It's like from morning 10 to 12 in the night and from morning 10 to 6 pm the 2nd day.

Btw: We don’t call any external speakers from outside. Everyone remain part of our fraternity. Everyone including the speakers are looking to learn from each other. 

It was total fun and amazing to listen to all the participants including the speakers. We are slated to do our yearly meet again this April. This time too we hope to maintain the flair if not bettering it. There will be new subjects and speakers who will be sharing their wisdom. We don’t look for quantity but quality here. The requirement to be a participant is simple. You just need to have the required passion for the subject. Rest of the details are given in the below form. Please fill it only if you are serious about being a part of it.
https://docs.google.com/forms/d/e/1FAIpQLSdfY1OwK02M4u-RzUZoGwnt3j6VLJDDafwT6RLeLUN8YV2mQg/viewform?vc=0&c=0&w=1
Read Full Article
  • Show original
  • .
  • Share
  • .
  • Favorite
  • .
  • Email
  • .
  • Add Tags 
Arun the Stock Guru by Arun Mukherjee - 4M ago
Quote: After a long hiatus finally am back to blogging. The reason for the hibernation was to comply to SEBIs diktat. Finally have got the SEBI Investment Advisor registration in place(SA INVESTMENT ADVISORS. SEBI Registration No: INA300011991). Wish each and every one of you a very happy,lively and prosperous new year 2019.

Forget all macro and let’s concentrate on only something where we are required to concentrate:-

1) There’s no bull or bear market this days as the cycle has shortened. Previously it would be 5 years of bull market and a bear market with same proportion of time but at present this are phases which are much frequent. It’s futile to hazard a guess and only resort is to stay put in good stocks backed by a ‘great sky is the limit’ aspiring jockey/managment team. Wherever there will be growth the market would pay a premium.

2) Nothing actually changed over the last few months yet at point of penning this note,the small cap index is down by 35% from its peak which is staggering. The greed and fear syndrome in market is back in vogue with this time being the latter. In a good market the PE gets rerated and vice versa on the reverse. Soon the albatrosses would find their junks desolated venue to make northward ways for the quality one.Your patience will get tested but conviction would be wildly rewarded.

3) If you are anxious about your portfolio but posses good quality cos with solid growth ahead backed by robust pedigree,sooth your nerves by fathoming the simple thing. The country is happy to grow by 6-7% yet the companies in your portfolio would grow at a minimum 20-25%. A few will grow by 40-50% CAGR for next 3-5 years. That’s serious growth folks. It’s only a matter of time before sanity comes back to the markets with eventual rerating of good stocks irrespective of small,mid or large caps.

4) When I go and speak to all the managments or visit the plants in person,it’s a complete different scenario. Everyone seems to be working over time. The order books are full,there’s more enquiries than ever,new employees are getting recruited,plants are being expanded-takes you to a different state of mind altogether. The idealogy remains simple,try to have that feel of lucrative business ownership and stock markets would automatically be a different place for you.

5) Avanti feeds adjusted everything moved from 7rs to 3000rs in a matter of 8 years. Nalanda capital swallowed a chunk of Page Industries during the era of 2007 at 600 bucks only to exit partly presently ar 25000 levels. Symphony moved from 2rs to 1200 almost in the same period. Enough of listening this sob stories. It’s high time you avail the bragging rights by just simply staying put in the companies you own as long as their growth story is intact. With time,they can only make you richer.

Conclusion: It fascinates me to the core sensing so many of the gullible retailers who are happy locking their money in FDs for decades,generating absoloute post tax peanuts but refrains to give bit of time to the best wealth generation asset in the world. The good part is I or you require nothing in lieu but just time and patience to grow richer along with all this amazing partners. The bad part remains,some of you will see,read,understand everything yet will panic and sell it to your neighbours at the least of prices only to see them getting liberated at age of 40 Vs your liberation at grandpa age of 60. You want to be in which boat-I leave that choice to you peeps.

Btw: We will be shortly launching our SEBI registered subscription based Investment advisory thing which will include the stock recommendation service pertaining to the high quality-high potential small and midcaps. If it interests you,do put a mail to arunsharemarket@gmail.com.

Regards,
Arun Mukherjee
SA Investment Advisors
Read Full Article
  • Show original
  • .
  • Share
  • .
  • Favorite
  • .
  • Email
  • .
  • Add Tags 

Separate tags by commas
To access this feature, please upgrade your account.
Start your free month
Free Preview