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Stay away from Power Generation Companies

Again I am getting few queries for buying shares of power generation companies.
But they have their own problems and I prefer Power financing companies over Power generation companies:
For various reasons:
I am again posting the analysis of India Bulls power (Power Generation Company) which was originally mailed to all my clients on 6-November-2009 immediately after IPO came, warning them to stay away from power generation companies.
Price the day mail was sent (6-November-2009 immediately after IPO came) was: 34 /-
After 2.5 years (16-june-2012) price is : 12.5/- (clearly underperforming, loss @ 63.2%)
Please read the detailed analysis below answering why you should still stay away from power generation companies:

Analysis:

Company: India Bulls Power Ltd.

Issue size: 1360 crores
Total projects under proposal : 6 Thermal power projects.
Total requirement of funds to operate all proposed project : 31000 crore

Key points for evaluating the investment proposal:

    • 1. Balance amount will be raised through debt and internal accruals hence interest cost will be high. (31000-1360-Internal Accruals)
    • 2. 1st power project to commence by Feb 2012, but considering the past history of implementation of these projects, gestation period may increase by a year. (Considering environmental clearance and delay in execution)
    • 3. Hence no cash flows till generation of power i.e. Feb 2013.
    • 4. Operating margins of peer company: Tata Power 15% to 20%. Hence low margin business.
    • 5. Since good quality coal is a key raw material, prices are in uptrend. This may put further pressure on margins.
    • 6. Ongoing litigation’s and criminal proceedings against the directors of India Bulls securities Ltd.
    • 7. Company has entered into PPA (Power Purchase Agreement) with Tata Power for 1000 MW, for 25 years and Chhattisgarh State Electricity Board for 65% of power generated in Bhaiyathan power project proposed in Chhattisgarh
    • 8. Ministry of coal has allocated two captive coal mines for Bhaiyathan power project.

Valuations:

1. As compared to peers:

Tata Power P/E of 31 EPS of 41.65
Torrent Power P/E 37. EPS of 8.57
India Bulls Power – P/E – N.A. EPS of Zero (Hence expensive at current valuation)

Recommendation:

Don’t expect much upside in the price unless revenue starts flowing.
If you want to be in the same sector, better go with the company which already have revenue stream in place and good project execution capabilities and experience in these projects like Tata Power.
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