Bernstein bullish on this sector, shares top picks

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

Nikhil Nigania, Director and Senior Analyst at Bernstein is bullish on the power sector due to the favourable demand-supply dynamics.

The power industry, Nigania noted, is currently experiencing a multi-year capital expenditure cycle driven by fundamental factors.

The demand-supply balance remains strained in India, particularly during evening hours or non-solar periods, with little indication of significant change expected over the next three to four years.

“So, it will be a favourable demand-supply situation and tonnes of capex which the sector needs. So, we continue to be positive,” Nigania added.

Power public sector undertaking (PSU) companies NTPC and Power Grid are among his top picks for their strong fundamentals and attractive valuations.

While NTPC has the benefit of being able to borrow at lower rates than its peers, Power Grid benefits from India’s strong transmission network.

As renewables, electric vehicles (EVs), data centres, and hydrogen usage increase, the need for grid investment will rise.

Both NTPC and Power Grid are well-positioned and reasonably priced, trading at 15-16 times price to earnings, in line with global peers, per Nigania.

Nigania also discussed the potential impact on capex investments due to the stricter draft rules for project financing issued by the Reserve Bank of India (RBI).

In Nigania’s assessment, a renewable project, which could previously secure funds at a 9% interest rate may now need to pay around 9.3%.

“A 30-basis point rise in interest rate possible for the borrower should not change the capex cycle in our view. It’s a fundamental sustainable capex story we see in India both on infra and power,” he added.

One basis point is one-hundredth of a percentage point or 0.01%.

Also Read | Why shares of REC, PFC, IREDA declined as much as 12% on Monday: Explained

Also, renewable companies tend to borrow in dollar versus rupee loans and currently, the spread between borrowing in dollar versus rupee is almost 150 basis points. So, rupee loans are much cheaper than borrowing in dollars. That also means the 30 basis points increase will not change the borrowing dynamics much, he noted.

Nigania said the new norms are a proactive move by RBI, which seems to be taking measures to ensure that lenders have more skin in the game, and are more cautious when they lend.

For the entire interview, watch the accompanying video

Catch all the latest updates from the stock market here

Elon Musk forms several ‘X Holdings’ companies to fund potential Twitter buyout

3 Mins Read

Thursday’s filing dispelled some doubts, though Musk still has work to do. He and his advisers will spend the coming days vetting potential investors for the equity portion of his offer, according to people familiar with the matter

KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow