Bridge India

Why this may be the decade for Indian power sector equities

The recent railway price hikes indicate that the Modi government is capable of taking tough decisions that are unpopular but in India’s long-term interest. This augurs well for the entire economy and in particular for the power sector.

  • Power prices need to be deregulated. This will mean prices go up in the short-term, but in the long-term that will ensure a more stable grid
  • The Minister of Coal, Power and Renewable Energy, Piyush Goyal has already shown his intent in allowing for greater private participation in the sector
  • Indian power sector equities might be en route to a dream run for the next decade

Prime minister Narendra Modi has demonstrated that he is capable of taking hard decisions. He bit the bullet and has announced a 14% hike in passenger rail fares. Railway fares is a highly sensitive issue. It remain one of the last but significant vestiges of the socialistic Nehruvian economic model. Low railway fares have led to a lack of investments into rail safety systems, better facilities, cleaner and faster trains, maintenance and expansion of rail infrastructure and train stations. While China is crisscrossed by the most modern high-speed trains, in India, a rail journey of just over 1,200 km between Bangalore and Mumbai still takes a painstaking 24 hours. This announcement might just be the beginning of a larger systemic reform that is so badly needed in India’s railways.

BLog_Indian power sector equities_image(Image source: Wikipedia )

The Indian railway is just one elephant in the room. An equally large elephant is India’s messy power sector. The cumulative losses for India’s power sector are estimated at USD 40 bn (INR 2,400 bn) per year. These losses, similar to the railways are due to the politics of power pricing. I have previously talked about how politicians pander to vote bank politics by opposing power hikes. India’s power sector is underinvested, badly managed and delivers abysmal power quality to its consumers – all because, prices are far too low to allow meaningful investment. The hike in railway fares signals that this government is serious about getting India’s economy back on track. We can expect similar reforms in the power sector.

The government has already shown its intent in setting India’s power sector back on track. Minister Goyal met with leading bankers last week to understand constraints in funding power projects in India. Although no specific announcements were made, Goyal gave out the right signals, conveying to the press that he understands the gravity of the problem and is keen to start implementing solutions. This may be rhetoric, but the stock market is optimistic. Stocks of power companies have already rallied by more than 50% since the exit poll results were announced in mid-May. The share prices of some companies like Torrent Power have doubled in the last three months. This trend will now accelerate and it could just be the decade for power sector equities.

Akhilesh Magal is Senior Manager- Consulting at BRIDGE TO INDIA.

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