Charge of power brigade

Stocks of power utilities, especially private players (Reliance Energy and Tata Power) have risen faster than the market barometer, the BSE Sensex, in the last couple of months.

Lately, stocks of public sector utilities (NTPC and Neyveli Lignite Corporation), too, have outperformed the Sensex. Is something cooking here, or is it just company-specific developments pushing up these stocks?

For Tata Power, the smooth progress including award of equipment contracts for its 4,000 MW ultra-mega power project (UMPP), besides the acquisition of a 30% stake in Indonesian coal mines, seems to have reflected positively.

As for Reliance Energy, the company finally bagged the second 4,000 MW UMPP (earlier awarded to Lanco Infratech). Reliance is also emerging as an infrastructure building company and, has various projects to be executed (order backlog of over Rs 7,000 crore), which is among key reasons for the rise in its stock price.

The power projects undertaken by these two companies, when completed, will result in their capacities multiplying (3-4 fold) to over 10,000-12,000 MW each.

For NTPC, the stock has only begun to outperform the Sensex since August 2007, post its Q1 results. The company has taken various business initiatives including that to secure coal supplies for its power generation projects and foray into power equipment manufacturing, among others, which the market is viewing positively.

In June, NTPC acquired a 44.6% stake in a transformer manufacturing company. In August, the ministry of coal gave an in-principle approval to allocate a coal block with 354 million tonnes of reserves to NTPC, thus adding to its aggregate reserves. A few days ago, NTPC signed a MoU with BHEL to set up a 50:50 joint venture to undertake EPC contracts.

Another positive factor, albeit for the short-term, is the inclusion of NTPC in the S&P CNX Nifty index, from September 24, 2007.

Says Mehul Mukati, research analyst, Emkay Share & Stock Brokers, “this has led to increased buying in the counter, especially by index-based mutual fund schemes. They will need to alter their schemes’ portfolios to reflect the inclusion of NTPC in the index. And these funds will compulsorily have to hold NTPC.”

A company’s entry into the index in most likelihood also results into other domestic and foreign funds buying the stock. Adding fuel to the fire is the low floating stock.

As on June 30, 2007, the government held 89.5% in NTPC while institutions held 8.33%; their combined stake at 97.83%. NTPC also seems to be on schedule to commission its new power projects, providing further comfort.

Neyveli has announced big plans, too, to triple its lignite mining capacity and increase its power generation capacity to 12,000 MW by 2012 from 2,500 MW now. Here, too, the floating stock is low at 6.44% (government holds 93.56%).

Little wonder, their respective stock prices have risen faster. Given the current scenario, viz., government’s increased thrust to augment new capacities and modernise existing infrastructure and, huge demand-supply gap, power utilities should deliver healthy returns in the long-run.

Coffee, creamy

Coffee prices have been on an uptrend recently due to the demand-supply gap in the global coffee market. Coffee is produced in two main forms, the costly variety Arabica, which accounts for two-third of world production and Robusta, which accounts for the balance. Indian coffee prices follow the Robusta coffee.

Last week, Hurricane Felix brought with itself fears of damage to Robusta crop and, hence the possibility of lower crop. According to a report on Bloomberg, the International Coffee Organisation was anticipating a deficit in supply of 8 million bags (1 bag is equivalent to 132 pounds or 60 kg) in the next season (2007).

The deficit is also due to the fact that Brazil, the largest producer of coffee globally is likely to see a drop in output due to weather-related factors. Hurricane Felix is likely to add to the supply deficit and this has pushed Robusta prices upwards.

Moreover, there are concerns that Vietnam, the largest producer of Robusta and second-largest producer of coffee globally, is likely to harvest less in the fourth quarter after some weakness in Robusta prices seen in July-August, which, though, have bounced back to July levels now.

The lower harvest also comes on the back of unsuitable weather conditions. Analysts estimate that output for this season would be around 18-19 million bags, 2-3 million bags lower than last season’s output (21 million bags) in Vietnam.

Since India exports almost 80% of the coffee produced, this situation seems favourable. However, Indian exports have also taken a hit on account of a rise in freight rates, shortage of containers in the last 4-5 months, to say nothing of the firm rupee.

Analysts feel, given these circumstances, profit margins of FMCG companies that sell (including Nestle and HUL) but do not grow coffee may be impacted, unless they pass on the cost increase to consumers.

For Nestle, if they are unable to pass on the costs, the impact will be relatively higher as coffee accounts for 20% of its revenues, compared to just 3% for Hindustan Unilever.

On the other hand, companies like Tata Coffee, which also grows coffee at its plantations, should benefit partly as a strong rupee is likely to offset some of the gains.

In the long run, global coffee consumption is growing steadily by 1.5-2% annually, which is positive for coffee growers. In India, too, consumption is rising, helped by changing habits (café shops) among others.

Given the background and the forecasted drop in supply with consistent demand, coffee prices are likely to remain firm with an upward bias at least in this season.