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Tariff cuts cast a pall of gloom on power stocks

All the talk of reducing power tariffs and and auditing distribution companies has been casting a pall of gloom on stocks of power sector companies. Utility stocks have been underperforming the markets this calendar year and the BSE Power index figures atop the list of biggest losers among all the sectoral indices of the BSE. Till date 2014, the BSE Power index is down 6.6% 2014 as compared to the Sensex, which has been marginally positive at 0.4%.
For over three years now, Indian utility companies have underperformed the Sensex by 43% due to various concerns such as lower merchant tariffs, unavailability of fuel, and state of the health of discoms. The latest talk of reducing tariffs by 20% in Maharashtra has been another dampener to the sentiments in the power sector.

Analysts, however, are not too perturbed saying that there is nothing much to worry about as these subsidies are not sustainable and the tariff-cuts could be rolled back postthe central government elections.
Says Bhargava Buddhadev, power sector analyst, Ambit Capital: “A similar thing had happened in April 2004 where power was sold at a lower rate to the agriculture sector, but that was only for a period of 15 months. Also, any subsidy announced by the state government has to be paid upfront to the power producers, so it's not likely to affect power companies."

Over the past year few years, multiple steps have been taken to resolve key issues relating to the power sector such as Financial Restructuring Proposal, fuel supply agreements but that has failed to enthuse investors so far in the power sector.

Stocks of companies such as NTPC, Reliance Power,Power Grid were trading lower at Rs 131.40 (-0.87%), Rs 409 (-0.70%) 25%, Rs 98 (-0.05%), whereas Tata Power and Adani Power gained marginally Rs 77.15 (+0.52%) and Rs 35.95 (+1.01%).
However, analysts expect power stocks to remain subdued for some time as investors are more worried whether there will be a clear mandate post the central government elections. If there is no clear mandate, tariff-cuts could remain for some time while the further power sector reforms may get delayed. This is dashing the hopes of a revival in the sector in the next six months, and power stocks are likely to continue to meander at these levels. Says Buddahdev: “For now, investors have little confidence in the outcome of the elections and most are preferring to wait and watch and will take a view only after the elections."
The reforms of the past year, however, could have a beneficial impact on the power companies in the very long run. A recent report on the utility sector by Goldman Sachs points out that “recent reforms – higher coal supply for generators and debt restructuring for of distribution companies – limit further downside, improve liquidity and reduce risk for lenders. However, we expect RoEs to improve only gradually."
For now, analysts say that the sector looks extremely undervalued and post-election reforms could revive the fortunes in the sector. Says Buddhadev: “All these stocks are quoting at ridiculously low valuations. If the election results are positive, there could be a re-rating in the sector."

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