The recent market correction has taken a toll on energy and power utility stocks as well but there is no cause for alarm yet, say people who track the sector.
In a recent report, analysts at Jefferies said opportunities for the power segment could come in through increased capex and higher merchant prices for power following the onset of summer. Over the last three months, the BSE utilities index has gained around 8 percent.
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Most energy and power utility stocks have been on a tear through 2023, earning them an additional moniker of "momentum stocks". The pace of gains moderated towards the end of the year, leading a section of the market to think that valuations may have peaked for the time.
Do fund managers overseeing dedicated power sector funds continue to have faith in the growing opportunity within the space and see investment potential?
Paras Matalia, Fund Manager, SAMCO Active Momentum Fund, says his fund has reduced exposure to stocks across the sectors as they have been struggling since January this year.
“If at all the markets go up again from here, then eventually our equity exposure will also go up based on the momentum,” he says. The fund has power and energy stocks such as PFC, REC, Inox Wind, Adani Power, ONGC, and Power Grid. Launched in July 2023, it has gained around 23 percent to date.
Here is what other thematic fund managers have to say:
Vikas Gupta, smallcase manager and CEO, Omniscience Capital
Investment Case: Gupta says he was one of the early players in the power space, adding the stock to his portfolios during 2018–2020. The sector has been negative for the last 10 years because there was oversupply and less demand, among other reasons, he says. As many projects could not be completed, it also resulted in a lot of NPAs for power finance companies; hence, people lost interest in the segment.
The bet for Gupta has played out well. “We waited patiently for over 1–1.5 years before the value-unlocking began in 2022-2024. Some stocks are rerating four or five times. But even despite that they are valued at 7x or 8x PE, making valuations reasonable,” Gupta says.
While selecting stocks, they make conclusions without looking at price action. “I need more value than the price. For example, I need a Rs 100 value, and I need a Rs 50 price. That's the only reason we look at the price. I don't care whether it's going up or down. as long as it is significantly below the intrinsic value,” he says.
Gupta continues to see opportunities for growth across all aspects of traditional power — from power finance to transmission and distribution. Many power companies, from NTPC to SJVN and NLC, are doing huge capex. “Most of these companies are getting plans commissioned in the next two years, which will nearly double their revenues in the near future," he says but cautions that often ROE in the space may look low because a lot of work that is happening is reported in the capital as work in progress. “But actually, if it's work in progress, I should remove that and adjust to what the return on operating equity is, and that will be quite good, and the same thing will be replicated when these new projects come,” he adds.
While most fund managers are excited about the renewable space, there is some scepticism about its valuation. Stocks within the segment are currently priced in the growth opportunity and are often overvalued due to the market buzz about the area, Gupta says. Instead, they prefer to look at traditional players like NTPC or NHPC, which also have a renewable component, he says.
Like Gupta, most fund managers Moneycontrol spoke to said they are open to investing in the space as and when the valuation is right and “the market presents the right opportunity.”.
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Power and energy presence in funds
Power is a part of many of their diversified small-case portfolios as well as their omni power portfolio, which, according to their websites, has been growing at a 3-year CAGR of 51.73 percent since its launch in 2021. Barring renewables, which are slightly overvalued, Gupta he is bullish across all power stocks — from NTPC to NLC and REC.
Rohit Singhania, Co-head - Equity, DSP Mutual Fund
Investment case
Singhania says that as a house, they have been positive on the power segment due to the strong demand growth in the segment over the last three years. As India moves towards its goal of becoming a manufacturing hub, apart from a demand for labour and land reforms, there will also be a demand for 24x7 power.
“If you look at power costs during peak hours, they go up almost twice. This shows the pressure on demand. That means you need more power plants. Till two years ago, the belief was that there was a need for more renewables. But now that everyone has understood, even Europe is talking about thermal power plants and gas-based power plants. So, the entire value chain of people who are setting up, the companies who are going to fund them, are going to benefit from it,” he says.
But the key, is the price at which you are getting those businesses. “The scope of activity is quite a lot. You will have that continuing for the next three to four years, if not more, and most of the companies in the value chain are already more or less pricing in most of the growth, barring a few. So that's the worry: You like the business, you like the opportunity, but you're paying everything for the business today itself,” he says.
At DSP, they just own very few names where they are comfortable with the business outlook and also with the price. “For me, as a fund manager, it has to be a combination of both — as an investor if you're investing just in the power sector and saying I want to put money in, you have to take a slightly longer call, maybe three or four years because you're not going to get that front-end return,” he says.
Power and energy presence in funds
DSP’s TIGER. Fund has stocks like NTPC and NHPC, while the New Energy Fund is focused more on the oil and gas parts of the energy supply chain. Over the last five years, the TIGER fund has given 175.6 percent returns and around 55.7 percent in returns over one year. The New Energy Fund has given returns of 145 percent and 41.3 percent for the same periods. In terms of energy stocks, it has oil and gas stocks like Gail, Petronet and Oil India.
Sanjay Doshi, Fund Manager -Equity Investments, Nippon Mutual Fund
Doshi manages Nippon’s Power and Infrastructure Fund.
Investment case: Current valuations are reasonable even for larger companies, he says. “We have to look at it from the capabilities of these companies to make the most of it and how they are moving in it. In that sense, none of these companies have moved above their peak valuations in the last cycle. So given that you have a more regulated structure on returns, which is likely to stay for another five years at least because that's what the new norms have already been out in the public domain, so in that sense, you can definitely trade at 1.8 to 2.5 times your books and all, and then if you add the kicker of renewables and all, the valuations are not expensive, and some of them can definitely see very steady growth and therefore more comfort in valuation over a longer period of time,” Doshi says. Over the past year, the fund has given returns of 31 percent and over 5 percent over 132 percent.
Doshi says that they definitely see good growth opportunities and a large capex coming into the power space in the next five to seven years due to power demand. If India has to grow at 7-8 percent plus GDP, then it will definitely require at least 1.2 times the growth in power itself.
“Structurally, I think very clearly, we need to have a better mix of renewables within the overall power mix, which today is less than 35 percent, and that needs to go up beyond 50 percent," he says.
India also needs to ensure we have enough power and energy security; hence, in the near term, we will see higher demand for coal-based power," he says.
Power and energy presence in funds
While the fund is mostly infrastructure-focused, around 18 percent of its allocation is to the power segment through stocks like NTPC, Power Grid, Tata Power, and CESC.
Over the past year, the fund has given returns of 70.34 percent and around 204.6 percent over the last five years.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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