Market watch: Equations of power revisited
REC lists today. The company went ahead with its issue in difficult primary market conditions and came out with huge oversubscription figures. It was a well-priced initial public offer (IPO) and should go on to list at a premium, maybe in the 120-25 zone. The problem is that REC’s peer set has corrected significantly since it did the issue and its relative attraction may have come down a notch. At 125, REC would be trading at 1.8 times its FY09 book value, the same as Power Finance corporation. Moreover, most public sector banks today trade at 1-1.2 times of their book value after the recent fall, and comparisons with such banks are not completely out of whack for a power sector financer.
In fact it’s a good time to revisit valuations in the power sector, a space which has seen some drastic falls following the Reliance Power IPO. Valuations have corrected between 35 per cent and 60 per cent. Some of the overownership hangover has dissipated and techncially it may have got a bit oversold too. NTPC is showing some reluctance to fall below 180 . It now trades at around 2.7 times book value. In a market panic it could surely drift lower but for a power sector bull this may represent a reasonable opportunity. Neyveli Lignite has crashed from 275 to 135 and trades at a 15 per cent discount to NTPC’s valuations but traders could still be stuck in that stock at higher levels. It may bounce but there could be supply at higher levels that restricts it’s upward mobility. Powergrid has corrected sharply, but valuations may still not have become mouthwatering. Despite the generous bonus there’s very little to value Reliance Power by, so that may come much lower in the pecking order for a sector where there is more relative value visible now. Power stocks haven’t become dirt cheap but they may bounce from oversold ground if the market recovery continues. There will be excitement around REC’s listing today, but am not totally convinced about the power sector financers given that most banks in India trade at a 35-40 per cent discount to those valuations. At the end of the day, they too are lenders, not exactly power generation companies.
It’s important to keep an eye on power and infrastructure stocks at this juncture as they have been the favourite whipping boys in the fall. If the market is now eyeing a period of reconstruction, signalled by the pullback of the last couple of sessions, the most oversold sectors could see sharp shortcovering rallies. The bigger question though is the durability of this global pullback which began from a retest of the January lows. Hopefully it has some steam in it.