Power firms trip hardest in the correction

Updated on Nov 22, 2007 11:05 PM IST

If there is one sector that stands out in the savage correction of the last few days, it is power, writes Udayan Mukherjee.

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None | ByUdayan Mukherjee

If there is one sector that stands out in the savage correction of the last few days, it is power. Both large-and mid-cap power stocks have corrected 20-25 per cent from their peaks, this week. From recent highs to Thursday's lows, that is till the late recovery set in. Point to point, Neyveli Lignite was down 25 per cent from Rs 230 to Rs 170, CESC and Power Trading Corporation were down 20-25 per cent from this week's highs. Large-caps have not done much better.

NTPC fell 20 per cent from Rs 285 to Rs 224, Reliance Energy from Rs 2,000 to Rs 1,600 and Tata Power lost nearly 25 per cent. Some would say this correction is long overdue.

Even a cursory look at the valuations of these stocks will convince you that they crossed the fundamental fair value zone long back. They had just become momentum favourites and traders piled onto them heedless of fundamentals and valuations. It comes as no surprise, then, that at the first whiff of correction these names have lost a quarter of their market caps. Froth is easy to whip up but gets blown off equally easily.

So, after the fall, is it time to buy power stocks again? Yes and no. From a trader's perspective the answer depends on the overall market picture. If the correction deepens, these stocks can certainly lose more value, as they are still quite far from screaming value levels. Even at these prices, despite factoring in great growth prospects, these stocks trade at price to book value (P/BV) levels that are too lofty. However, the power bulls are strong, and if they get help from the market they will push these stock prices higher. In any case, it is not a great sector to be short in, as that would be going against one of the most powerful themes of this bull run. That is dangerous. Investors should monitor some of these stocks very closely now as, if the downturn continues, some of them will present buying opportunities, minus the froth. The lesson from this episode is simple though: whatever the sector, whenever stocks drift away too significantly from reasonable value, they always revert close to that mean. It pays to not get carried away by momentum sometimes and wait patiently, as these "overheated" sectors always give you a better entry point. As power stocks are about to.

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