India’s largest mutual fund is getting bullish again on a beaten-down sector

MUMBAI: India’s largest fund house, SBI Mutual Fund, notably increased its exposure to power stocks in May on a likely bet that this space may see a similar re-rating as was witnessed by other beaten-down sectors like steel, capital goods and pharmaceuticals in 2020.

SBI Mutual Fund raised its holdings in the shares of Power Grid Corp, NTPC, NHPC, Tata Power, and Kalpataru Power Transmission in May reflecting its growing optimism over the space. Over the past two months, power stocks have attracted investor interest with the BSE Power index hitting a decade high earlier this month.

“Till late last year, the entire listed space in the power sector was written off, assuming that they can never show good earnings growth going forward. But several aspects have changed or are likely to change going forward,” said Dinesh Balachandran, fund manager at SBI Mutual Fund.

Balachandran, who heads SBI MF’s contra fund, expects power distribution companies to show good earnings growth because of monetization of various distribution circles in India as well as return of growth in existing portfolios as the private investment cycle picks up.


Similarly, the fund manager is also betting on improving exposure to “good quality” power companies, which are going towards the renewable energy, to further enhance their operations. Companies like NTPC have already set themselves ambitious targets to generate renewable energy, while others such as Tata Power are unlocking value in their renewable energy portfolio via demergers.

Another factor that is aiding the rise in interest in the sector from investors is the improvement in balance sheets of some power companies. With the government infusing liquidity in Power Finance Corporation and REC over the last year, it has enabled state-owned discoms to clear out a significant share of their dues to power generators.

Analysts believe the limited impact of the second wave on power consumption and expectations of strong growth in the manufacturing sector in the coming years makes the power sector a low-risk bet on the upturn in India’s investment cycle.

Money managers are also of the view that the surge in demand for power in the country going ahead could help the existing infrastructure to do better compared with the past few years when over-capacity and muted industrial demand dented prospects.

Anuj Upadhyay, deputy vice president of research at Emkay Global Markets and a power sector analyst, is of the view that the sector is undergoing a re-rating akin to the one seen in other ‘old economy’ sectors like steel, manufacturing and construction.

“Power stocks had remained underperformers over the past 12 months despite their sustainable earnings growth of more than 5-10 per cent during the pandemic with an ROE of more than 10 per cent in some cases,” Upadhyay said.

While shares of power sector stocks have risen 2-31 per cent over the past two months, they still remain anywhere between 5-515 per cent away from their record highs. The BSE Power index is still 78 per cent away from its lifetime high hit during the heydays of the 2000s.

“Investors have now started to believe that the returns are sustainable, cost of equity is at a very low level so the spread that they get on RoE over the earnings could be at a much better multiple,” Upadhyay said.