What is the ‘Saubhaghya’ Scheme?
The nitty gritty of the ‘Saubhagya’ scheme a.k.a. the ‘Pradhan Mantri Sahaj Bijli Har Ghar Yojana’ have been cogently explained by Utpal Bhaskar of Mint.
— PMO India (@PMOIndia) September 25, 2017
For our purposes, it is sufficient to know that a whopping sum of Rs. 16,320-crore will be spent on providing electricity connections to over 40 million families in rural and urban areas by December 2018.
The underlying theme is that the electricity distribution companies (discoms) are not interested in supplying to the villages even if the electrification has taken place. By providing electricity access to all households with prepaid and smart meters, demand will be created which in turn will force the discoms to supply to these villages.
Which stocks will benefit from the ‘Saubhagya’ scheme?
Now, this is where we have to carefully apply our minds and ensure that we are backing the right stock(s) because this can make or break our dreams of riches.
Adani Transmission, in which Billionaire Gautam Adani holds a stranglehold of 74.92%, appears to be the ideal choice.
The Billionaire has incredible business acumen and is also on close terms with the people in power, including NAMO.
It is obvious that distribution of electricity is not possible without transmission lines and this is where Adani Transmission will be able to call the shots.
Recommended by Mudar Patherya
It is worth recalling that Adani Transmission was first recommended by Mudar Patherya in January 2017 as being investment worthy.
Mudar laboriously explained that Adani Transmissions has “multiple triggers” for growth and that it will prosper immensely owing to the numerous reforms taking place in the power sector. He described it as the “ideal combo of security and growth“.
This prediction has turned out well. Adani Transmission has delivered mind-boggling gains of 239% on a YoY basis and 376% over 24 months. The gain since Mudar’s recommendation is a whopping 137%.
Adani Transmission has “Potent growth platform”: Edelweiss
Swarnim Maheshwari of Edelweiss has issued an initiating coverage report in which he has recommended a buy of Adani Transmission.
The logic is quite convincing:
“We initiate coverage on Adani Transmission (ATL) with ‘BUY’ and NPV based TP of INR154. Our conviction is underpinned by: 1) whopping INR3tn domestic transmission opportunity over FY18-22; 2) aggressively growing ATL capturing 20% of TBCB projects; 3) debt restructuring & additional leveraging boosting IRR of existing/M&A projects by 300-400bps; and 4) scale & synergy benefits as O&M costs are spread across projects. Hence, we estimate the company to clock 19% and 36% EBITDA and PAT CAGR, respectively, over FY17-19. We expect ATL to generate robust FCF, though we do anticipate high growth and M&A appetite. Cost overruns in new projects, aggressive bidding in TBCB projects, unfavourable regulatory changes and delay in true-up orders are risks.
INR3tn domestic transmission opportunity over FY18-22E
Over FY18-22, investments in the transmission segment are estimated to jump 1.5x compared to FY12-17 to a whopping ~INR3tn. Of these, ~INR0.9tn projects are expected to be awarded on tariff based competitive bidding (TBCB) basis. We estimate ATL to garner 20% share of these projects by virtue of its lead position in the domestic market.
Robust credit profile: Leveraging USP to enhance value
ATL has successfully restructured debt by issuing Masala bonds and USD/INR denominated offshore bonds worth INR45bn at a blended cost of ~9%. This has led to 100bps interest cost savings, ultimately boosting project IRRs by 150bps. Additionally, the company enhances debt proportion to 85% from 65-70% leveraging its strong credit profile, thereby releasing equity and boosting IRRs by another ~250bps.
Aggressive growth to drive economies of scale and synergy benefits
ATL’s strategic bidding approach and capacity expansion (2x to 11,500cKm) are likely to improve project IRR by 40-50bps as O&M cost is spread across projects.
Outlook & valuations: Potent growth platform; initiate with ‘BUY’
With existing assets generating INR10bn FCF p.a., ATL is positioned to satiate its growth and M&A appetite. Moreover, potential to fund its aggressive growth plan at lower cost lends an edge. In our NPV-based TP of INR154, we assign 25% to growth value. Our valuations could be in INR154-185 range if we assign a higher market share provided the company maintains same economies in expansion. Initiate coverage with ‘BUY/SO’.”
CLSA On Power Sector Outlook: Capex Budget For Saubhaghya Scheme at $2.5bn
— BTVI Live (@BTVILiveNews) September 26, 2017
Genus Power Infrastructure Ltd
Genus Power appears to be a no-brainer beneficiary of the Saubhagya scheme given that it manufactures ‘smart meters’.
It is to be noted that the Saubhagya scheme contemplates the installation of ‘prepaid and smart meters’ in the villages.
Fav stock of Ashish Kacholia and Vallabh Bhanshali
As of 30th June 2017, Sushmita Ashish Kacholia holds 45,66,252 shares of Genus while Vallabh Bhanshali holds 29,85,700 shares.
It is obvious that the two visionaries have foreseen that Genus will do well in the foreseeable future.
Genus is set to ride the metering market boom: IIFL
IIFL has issued an initiating coverage report in which it has explained all the nuances of Genus Power and recommended a buy.
The logic is succinct and compelling:
“Genus is the largest player in the domestic electric metering market with a 27% market share and installation base of 42mn units across the globe.
Post the FY17 blip, domestic metering market is expected to bounce back stronger over the next three years even as DISCOMS work towards reducing AT&C losses to meet UDAY targets. Further, demand for smart meters is expected to jump multifold as AMI would be integral to the creation of smart grids. The technology tie‐ups with Silver Spring Network (SSN) and Global Utilities Management Co (GUMCO), Nigeria have thrown open a plethora of export market opportunities. ECC business is also expected to turnaround as execution picks up in two large projects. The above factors would collectively lead to revenue CAGR of 23.5% over FY17‐19. Margins are expected to expand 110bps over the said span with strong growth in metering volumes, higher share of smart meters and turnaround in ECC business. We believe valuations are attractive at 11.2x FY19E P/E with an earnings CAGR of 27.9% over FY17‐19. The stock would witness re‐rating on the back of strong growth in the domestic metering market. We initiate coverage on the stock with a BUY rating and target price of Rs.74 (16x FY19 P/E).”
Other stocks that will benefit from Saubhagya
According to Jitendra Kumar Gupta of Moneycontrol Research, companies providing “last mile connectivity” make for good investment.
Rural Electrification Corporation (REC), the blue-chip PSU, is one such no-brainer stock.
REC is the nodal agency for the government electrification programme and will obviously have its finger in the Rs. 16,300 crore pie.
REC will enjoy higher disbursements for the generation and T&D space on which it makes an attractive 5% NIM.
Power Grid, the other blue-chip PSU, is also a fail-safe no-brainer investment.
Jitendra Kumar Gupta has also identified companies in the transformer, cables, insulator, transmission lines and substations business which will benefit from the Saubhagya scheme.
ABB India, the blue-chip MNC, is a good contender, given the expertise and dominant positioning in the products that are required in the T&D space and power substation.
Transformer companies like Voltamp Transformers will also have their day in the sun because transformers will be required to connect remote villages with relatively less density of consumers.
Jitendra Kumar Gupta has also put the spotlight on companies like KEC International and Kalpataru Power.
He explains that both companies are currently sitting on a strong order book and have revenue visibility of close to two years.
He adds that in terms of the valuations, Kalpataru Power, which is trading at about 12 times its one-year forward earnings, is relatively cheaper compared with KEC International currently trading at about 20 times its forward earning.
It is obvious that we have to be proactive in the matter and grab the best stocks before the others do. There is a wide array of stocks that we can choose from to add to our portfolios!