Jitendra Kumar Gupta Moneycontrol Research
Prime Minister Narendra Modi, while addressing a gathering recently, stressed on “Power for All” by illustrating a very interesting fact that despite the fact that light bulb was invented by Thomas Edison, more than 125 years ago, it is unfortunate that more than 40 million households are without power.
The government intends to electrify all the villages by the end of December 2018 with the total investment outlay of Rs 16,320 crore. The industry estimates suggest that implementation of 'Saubhagya', the newly launched scheme to electrify all villages, could lead to an additional demand for 25,000 MW of power, which is about 7 percent of India’s current installed power capacity of 3,29,000 MW.
Will the generation companies gain? While this is slightly positive for generation companies, the real issue that experts highlight is that even if the connectivity is provided, will Discoms supply power and how will they collect money?
That raises questions about generation growth. Barring generation, what is interesting is that companies in the ancillary sector or the companies which will provide supporting infrastructure for the last-mile connectivity will benefit.
A look at companies providing the last mile connectivity One obvious party to this is state-owned company Rural Electrification Corporation (REC), which is also a nodal agency for the government electrification programme. REC, which provides funding for such projects, can now hope for higher disbursements for both the generation and T&D space. While investors have an apprehension about quality of assets of REC considering the net NPA of close to 1.6 percent, what is interesting is that it makes close to 5 percent NIM and has received good visibility.
The other state-owned company that could possibly benefit is Power Grid which will help in providing transmission lines to connect the villages. Power Grid, which spent Rs 28,200 crore in FY17, makes regulated return on the equity investment in these projects.
While Power Grid merely owns and maintains these assets, in the downstream there are lot many companies in the transformer, cables, insulator, transmission lines and substations, which benefit a lot with the spending on the T&D sector. ABB India, which generates about 20 percent of its revenue from the electrification products, could be a good contender, with the expertise and dominant positioning in the products that are required in the T&D space and power substation.
This will also mean a good opportunity for transformer suppliers particularly in the smaller capacity like sub 220 KV transformers, which will find their applications in connecting the remote villages with relatively less density of consumers. Companies like Voltamp Transformers are the leading players with lot of spare capacity in the sub-220 KV segment. Voltamp, which is sitting on cash (25 percent of market capitalisation), operated at capacity utilisation of 78 percent in FY17 and sitting on good order book providing improved earnings visibility.
Other two prominent players in the value chain and direct beneficiary of this would be KEC International and Kalpataru Power. Both the companies get most of their orders from Power Grid and are currently sitting on a strong order book, which provides revenue visibility of close to two years. However, in terms of the valuations, Kalpataru Power, which is trading at about 12 times its one-year forward earnings, is relatively cheaper compared with KEC International currently trading at about 20 times its forward earning.
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