The government’s thrust to improve electrification across the country and a favorable regulatory regime makes power sector a good investment proposition. We have indentified two power utility companies, which would be prime beneficiary of government’s electrification thrust and are also available at attractive valuations.

NTPC Limited (NTPC) has a strong pipeline of ~5,000MW of new capacities to be commercialised in FY2020E at group level, which shall drive strong growth in its regulated equity. This coupled with our expectation of nil fixed cost under-recoveries in FY2020E on back of improved coal availability would drive double digit earnings growth and 155bps improvement in RoE over FY2019-FY2021E. NTPC is also trading at attractive valuation of 1x FY2021E P/BV on standalone basis. Hence, we have positive view on NTPC and expect 20-22% upside potential.

CESC Limited’s (CESC) standalone business generates steady earning and cashflow while we expect its loss making subsidiary (Dhariwal Infrastructure) and Rajasthan distribution franchisee to pare losses at fast pace and turn profitable in FY2021E/FY2022E. Given our expectation of turnaround of loss making subsidiaries, we believe that CESC is trading at attractive valuations of 0.9x FY2021E P/BV on standalone basis. We have Buy rating on CESC and price target of Rs905.

Power Grid Corporation of India Limited (PGCIL) is expected to maintain its growth momentum, as it has ~Rs. 63,000 crore worth of projects pending for capitalisation, which provide healthy earnings growth visibility. PGCIL has a healthy RoE of ~17-18% and is also trading at an attractive valuation of 1.5x FY2021E P/BV. Hence, we have a Positive view on PGCIL and expect 10-12% upside potential.

Our Recommendation CMP(Rs.) Price target (Rs.)/Upside (%) Action
NTPC   20-22% Invest Now
CESC   Rs. 905 Invest Now
Power Grid Corporation   10-12% Invest Now

 

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