Switch from Reliance Power to NTPC or CESC depending on your risk profile

Prefer NTPC, CESC: We have compared Reliance Power with NTPC and CESC on various parameters like operational efficiencies, progress on expansion, balance sheet strength, risk and prevailing valuations. Given the multiple concerns for the power generation companies (like coal linkage, execution delays, forex fluctuations etc), we believe it is better to stick with companies with power generating assets (that provide free cash flows), assured returns and higher certainty of future earnings. Thus, it is better to switch from Reliance Power to NTPC (for conservative investors) or CESC (for more aggressive investors).

Key points

Reliance Power - execution delays and uncertainty of coal usage issues: Reliance Power is having just 600 MW of operating capacity currently and expects to add 1200 MW in the next one year period. The company has an ambitious plan to add above 18000 MW in future. However, two major developments have turned negative for company; which in effect are likely to delay or bring uncertainty in the execution of two of its projects.

NTPC - high return ratio with large generating assets: NTPC is the largest power generating utility in India and also one of the most efficient players. We like its large operational assets which are generating healthy cash to fund future growth. Moreover, with it having a FSA with Coal India, it has relatively high safety of coal supply. Also, the assured high return on equity (RoE; 14%) which could be sustained despite capacity addition is difficult to ignore.

CESC - extremely attractive valuations; retail spin off is additional trigger: CESC is one of the cheapest utility stocks available in the Indian market, despite it being one of the most integrated utilities. We believe the discount in its valuation is overdone as the financial health of its retail business is improving since FY2011. Further, a possible break even of the retail segment by FY2015 coupled with growing scale of the utility business would consequently reduce the impact of the retail business' drag on the overall balance sheet of the company.

Source : Equity Bulls

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