Both Indian and global utilities firms outperformed their benchmark indices by at least 10 per cent during the 2008 crisis, and are doing so now. Valuations of Indian utilities are currently 50 per cent below those during the Global Financial Crisis (GFC).
Investors should look at companies with an assured return on equity (ROE) — about 15 per cent — and that would provide adequate earnings visibility and command a premium over current valuations, said analysts.
“The business models of Indian utilities are decoupled with minimal demand/volume risks, evident from their strong earnings trajectory even during the GFC and the current crisis so far,” said Swarnim Maheshwari, analyst, Edelweiss Securities.
“Indian regulated utilities provide one of the best margins of safety in the current market fall-off and we prefer companies with highly regulated business models such as NTPC, PGCIL, Torrent Power, CESC, Tata Power and JSW Energy,” he added.
In the past 15 years, the profitability of regulated companies has hardly been affected despite the decline in power demand growth. A case in point is the strong EPS trajectory despite power demand declining over the past two quarters, said analysts.
“Earnings outlook for power utilities such as NTPC, Power Grid and CESC is relatively immune to concerns of coronavirus outbreak as regulated tariff models assure fixed RoE on power generation and distribution assets,” said Abhijeet Bora, research analyst, Sharekhan.
NTPC is trading at a historically low multiple of 6 times its FY21 estimated PE with a dividend yield of 7.6 per cent. PTC India, which is likely to be re-rated after value unlocking in the PTC Energy subsidiary, is currently trading at a dividend yield of 11 per cent.
Coal India, which is considered a good defensive bet, trades at an attractive dividend yield of 10 per cent. Power Grid Corporation, SJVN, NHPC and Neyveli Lignite trade at dividend yields of 6 per cent, 11 per cent, 8 per cent and 11 per cent, respectively, with stable earnings.
“India’s power demand will not be affected adversely by the crisis while coal availability from domestic linkages as well as imports has not been affected. We also do not anticipate any adverse impact on the financial health of distribution companies,” said Rupesh Sankhe, analyst, Elara Securities. “We believe sector fundamentals are bottoming and we can see meaningful recovery ahead, driven by uptick in power demand, slower capacity addition and a slew of reforms.”
Rupesh Sankhe of Elara Securities recommended stocks such as Power Grid Corporation, NTPC, PTC India and Coal India.