This is a discussion on the fundamentals of energy sector, which companies to invest and avoid. Note of caution: this is in no way, any recommendation to invest, and I am not liable, in any way, for any consequences.
There is a tectonic shift in the energy scene in India. here are the salient developments:
1. Oil - ONGC is producing less and less, and more worryingly, finding less and less . Private players are no different, when it comes to success in exploration.
2. World oil prices are heading lower, but this likely to be a temporary phenomenon. In 10 from now, I expect oil prices to be double of where it is, now.
3. In India, natural gas is not a game-changer. At least not yet. All efforts to pipe gas to end consumers is a mixed bag. For Industrial consumers, it has been a fairly successful things. Private consumers are largely restricted to cities.
4. The government continues to push Nuclear energy vigorously, with those countries who are willing to play ball. Equity returns from companies focused on Nuclear, are likely to be slow and steady, and will be like bank rate of return.
5. Wind power was pushed aggressively by the UPA, ahead of solar, mainly due to technical reason. At that time, a decade and half ago, wind power was cheaper to instal. However, the cost per kwh of wind power has not kept with time. It has stayed. On top of it, maintenance of windmills is an expensive proposition, which makes the cost per kwh significantly higher than coal. Unless government gives big subsidies, it is not viable. Companies like Suzlon suffer on multiple fronts - cost of capital to instal and run ( BOO or BBOT model) , the right technology, and non-payment from state electricity boards. With Solar power costs coming down crashing, state boards are playing the wait-and-watch game, rather than investing in new windmills. That does not bode well for the likes of Suzlon.
5. Due to rapid technological advances, now, SOLAR power is as cheap or marginally higher, than coal. That makes it a wonderful proposition in a hot, tropical country like India. Maintenance costs too are rather modest, even in inhospitable terrain like the deserts of Rajasthan or in Ladakh. The key component, the solar panel, is imported, mainly from USA and China. If any producer in India comes up, they are the ones to subscribe to. The key drawback of Solar power is that it is not a 24*7 source, which means, you need alternate sources during nights, rainy periods etc. to back up. Solar will signficantly cut our carbon footprint too. The sad part is, India did not see this coming, so not many producers have invested in research and production of panels. The Chinese and Americans are making hay.
6. Hydro-electric power is suffering from erratic rains. I do not expect to see significant investments in the future . Companies like Torrent Power, Tata power etc are likely to stay flat over the long term, unless they reinvent themselves.
7. One beneficiary of this will be battery companies like Amara Raja. I think they will do well to tap the storage requirements, especially in stand-alone smaller solar units, and will do well over the long term.
8. Transmission and distribution companies like T&D Areva, Jyoti Structure, Voltamp etc... will continue to be depend on the vagaries of the state electricity boards. The UJAS scheme has given a temporary relief to the balance sheets of the state electricity boards, but it has only kicked the can down the road. The long term solution lies in stopping of free electricity, removing pilferages, and timely collection of bills - these are very difficult, in a country like India. So, I am not very gung-ho on them.
9. With LED bulbs, again, companies like SuryaRoshni or Wipro Lighting should ideally benefit, but, with volumes increasing, their margins are getting squeezed too, so they are not exactly exploding in the stock market.
10. Alternative fuels like baggasse, ethanol etc - I do not see a future in India for these, since Solar costs are coming crashing, and it is cleaner. So, companies like Thermax, BGR, Cethar Vessels etc may be affected, unless they reinvent. Thermax has a subsidiary called TBW, specializing in alternate fuel boilers.
11. nett nett... where to invest in the energy sector?
My mantra for the long term - AVOID excessively leveraged companies that have a drag on their balance sheets - BGR, GVK, GMR, LANCO, Suzlon etc... you can speculate short term if you wish to, but to me, these are not investment-grade. AVOID political animals like ADANI POWER.
AVOID - Banks that have exposure towards thee excessive leverages
My take ( all long term only)
1. Evergreen companies like L&T, Siemens. Cummins
2. Risky bets like CG power, Torrent power ( small portions of your portfolio)
3. Amara Raja - not just for energy, but for auto and comms sector reasons too.
4. Select companies in energy space like Technoelectric engg, KEC and Kalpataru power
5. PTC Finance - is a power-sector related play, which will do well over the long term, since their payments are secured by govt backing.
are the experts in dissecting some of these companies and suggesting what could be good plays.
After my illness, my memory is failing me , in terms of specific names. I have tried to recollect as much as I could.
Disclaimer: With market at all time highs, I other than L&T, Cummins and Amara Raja , I do not have any personal exposures in any of these companies. I plan to take position whenever the market corrects 30% or more. Nifty currently rules at the 9650 mark
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