Thursday, October 22, 2009

POWER GOLD MINE OF INDIA



Power is an essential requirement for all facets of our life and has been recognized as a basic human need. It is the critical infrastructure on which the socio-economic development of the country depends. The growth of the economy and its global competitiveness hinges on the availability of reliable and quality power at competitive rates. The demand of power in India is enormous and is growing steadily. 

For any economy to growth consumption of power is vital. The opening up of the energy sector to private investors as part of the Indian economic reform gave an   energy boost  desperate needs Indian power industry is now a highly opportunistic place of investments. Private equity (PE) players to invest around  $1.64 billion worth of infrastructure funds, mainly in power sector.

PE investment in the power generation sector dropped by around 80% between April and September 2009, to $157 million (around Rs 770 crore) from $902 million (Rs 4,419 crore) a year earlier.But still it remains the high alert zone for getting good return over investments. According to Venture Intelligence, a research service focused on PE and mergers and acquisitions, investments in the power sector took jump  were $122 million in 2006 to  $495 million in 2007.



So now a many question swill come in our mind asking

  1.  What are the growth prospects of power sector?
  2. Upcoming new power projects and its prospects.
  3. Invisible negative impact and fate of doing investment in power IPO.
  4. Long term outlook 2-4years.
Growth of Power Sector infrastructure in India since its Independence has been noteworthy making India the third largest producer of electricity in Asia. n its quest for increasing availability of electricity, India has adopted a blend of thermal, hydel and nuclear sources. Out of these, coal based thermal power plants and in some regions, hydro power plants have been the mainstay of electricity generation. Oil, natural gas and nuclear power accounts for a smaller proportion. Of late, emphasis is also being laid on non-conventional energy sources i.e. solar, wind and tidal. Growth of the industry today is not standing on the traditional method of power generation. Newer forms have expanded the diversification and growth of the Industry. The economics of the power sector is almost entirely driven by the domestic market and the attractive demand-supply dynamic. If we look at the demand supply of the power industry of India we find that

India needs incremental power capacity of one lakh Mw over the next five years. Peak power deficit in India goes to as high as 18.6%. The onus is on private players to add 40,000 Mw by 2015.




UPCOMING NEW POWER PROJECTS IN INDIA.

We also find a strong list of upcoming Power projects in India. Some of them as follows:
  • Neyveli Lignite Corporation Ltd is setting up the Barsingsar power project with Rs 1,368.25 crore, which is under execution. It consists of two power units each of 125 mw capacity. The project is expected to be complete by 2009.
  • Another project by  Neyveli Lignite which is setting up a 500-mw thermal power project at Bikaner, which is in planning stage.
  • Rajasthan Rajya Vidyut Utpadan Nigam Ltd is setting up the Giral lignite power project with Rs 1,350 crore investment. The state government's project is partially complete and is coming up at Giral, Barmer. It consists of two lignite-based power units each of 125 mw capacity.
  • The Nigam's Chhabra thermal power project with an investment of Rs 1,750 crore is also under execution. The project has two power units each of 250 mw capacity. It is expected to be completed by 2008.
  • RRVUNL's Suratgarh power project stage-IV with an investment of Rs 750 crore is under execution. The 250-mw coal/lignite-based thermal power project is expected to be completed by 2008.
  • Also under execution is the Kota power project stage-VII with Rs 800 crore investment. The project is of 195 mw capacity and is expected to be completed by 2008.
  • Marudhar Power Ltd's lignite-based power project with an investment of Rs 750 crore is under execution at Bikaner. The project consists of two power units each of 135 mw.
  • Raj West Power Ltd, a company belonging to Om Prakash Jindal Group, is setting up a lignite-based power project at Barmer. It is under execution and is expected to be completed by 2008. The project cost is estimated at Rs 4,804 crore.
So many projects will attract huge foreign inflow as well as domestic which will drive the sector growth to new heights. More over the return from these investments will be time consuming as break even level will be achieved after certain time frame from start off. But the hidden treasure of growth lies once the projects crosses the break even and start generating future cash flow. This list stand for the demand that is being generated at present situation. In coming days many more will add on which will make this power sector lucrative as gold mine.

INVISIBLE NEGATIVE IMPACT

In coming days we will find many more huge investments being drawn by this sector.

But at the same time too many players in to a particular segment leads to optimized growth as well as far more increased decline. Their is a saying in English too many cook spoil the broth. It’s same here. Too many projects and will increase price bargaining. Companies will be compelled to go for reduced margin sales, resulting less profitability. The companies will fight against each other to make the most competitive bidding. Despite of all these the power sector will remain lucrative for private equity and venture capitalist in the long run.


Since demand for this sector is never ending process and will continue to grow in the coming days. In recession times the demand might drop for a certain time but it will again shoot up like any thing. In the past couple of the capital market witnessed some major power share IPO hitting and went off speechless. Investors frowned over the return they got from the IPO on the listing day. Investors were in this expectation that the share ipo will make their investment to double. But again here we made too much expectation from the initial phase. The place where we failed to identify the capability of these share ipo’s to give return is our short term out look. We never looked in to the process of the industry, when it will generate return over investment. This sector is highly capital intensive and major generator of negative cash flow in the initial phase.Once the projects gets started and power generation and supply begins from these projects the sector will be nothing next to a gold mine.


Investors who are doing investment in this sector via capital market will have to wait for their investments to grow since all the projects are on establishment process. The companies who are engaged in building these projects will not get positive cash flow from the first year. It will take some time to break even and then generate future positive cash flow. The sector might face hard times in the initial phase as too many investors expect too much expectation. According to the industry process it will take time to establish power plants till then it will  generate meager return to investors which  will lead to investor  pull back from investments. This pull back is only driven by too much expectation in the initial phase and not on long term outlook.



Those investors or private equities and venture capitalist who desires to do investment should look into the invisible future growth of the sector that will take birth from the huge upcoming never ending demand of power in India. This sector is as good as a gold mine. Pricing issues and others factors of so many power players will be their but as more demand will increase this factor will get more reduced.


LONG TERM OUTLOOK

The reason for this bullish growth emanates from two reasons. One is the continued capacity expansion plan and investment outlay from the government. Two, growing demand in the domestic market. India’s power deficit is about 14% during peak hours. Again, this varies from state to state. The more industrialized a state is, the more its demand for power. Maharashtra for example, faces a deficit of more than 30 percent. Chronic power shortages and widening power supply-demand gap is creating tremendous opportunity for privat investment encouraged by government policies.


According to a McKinsey study ‘Powering India: The Road to 2017’, if India is to grow at 8% for the next ten years, its power requirement may rise from 120 GW to 315 to 335 GW by 2017, requiring an investment of $600 billion on adding the required capacity So we find a never ending demand and huge untapped potentiality for venture capitalist and private equities.


So while on one hand India is developing new and enhancing existing traditional power sources, at the same time it is also laying emphasis on non-conventional sources such as solar and wind power. Moreover, post Budget 2009-10, the Power Minister has announced an addition of 16,000 MW by independent power producers by the end of the Eleventh Five Year Plan and that the target of 78,750 MW would be met by 2012. In addition to this, the Government has announced plans to set up a first-of-its-kind energy efficiency company under the purview of the Union government.

The below chart shows the demand and supply shortage of power supply.This never ending mismatch makes this sector more lucrative for expansion and growth.

Having equity participation from four PSUs -- NTPC, Power Grid Corporation, Power Finance Corporation and Rural Electrification Corporation -- the company will be called Energy Efficiency Services Ltd (EESL). This company will engage in energy efficiency and consultancy.


The profitability of the power generating companies is expected to improve in the coming quarters as the GoI is well on track to provide long-term fuel linkages to the po wer plants. Coal India Ltd. (CIL), which mines about 85% of the coal produced in the country, is expected to sign a fuel supply agreement (FSA) with certain PSUs,with an assurance to supply coal for 90% PLF. In the current scenario of fuel shortages, the power generating companies should benefit extensively from this development. With reliable fuel linkages, the Peak Load Factor of the power plants should improve and correspondingly result in better margins for the power generating companies.


The excessive demand scenario for power in the country also implies significant growth potential for the power sector. India has historically been a power-starved country, with the peak power deficit standing at 16% in FY07-08. The GoI has charted out its mission of ‘Power for All by 2012’, which calls for a YoY capacity addition of 18,000–20,000 MW during the ongoing five-year plan. The mission also targets an increase in the per capita consumption of electricity from 631 Kw/hr in 2006 to more than 1,000 Kw/hr by 2012.



So the never ending demand increases the value of the power sector. Once the companies start off their power supply distribution the companies will generate huge reserves which will give them more space to expand and generate future growth. My advice to the investors is not to look for short term outlook of the sector. Look into the long term prospects and stay invested for long term. Its India’s another untapped gold mine. Private equities and venture capitalist will find huge return over their investment in the coming days.

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