Gold Silver Reports — Power Grid could Rise 20% More if Rates Fall by 50 bps — The Power Grid stock, which has already rallied by about 30% so far in calendar 2016 and could possibly rise another 20% over the next 12 months factoring in a 50 bps fall in interest rates in the same period, CLSA said in a report .
The yield on India’s 10-year G-secs has fallen by 60 bps year-to-date (YTD), driven by a combination of global and domestic factors. “A drop in interest rates is positive for regulated-return utilities, as this increases their spread over fixed-income securities,“ the CLSA note said .
Due to a relatively stable and regulated return-on-equity (ROE), utility stocks offer a safe haven to investors during bouts of market volatility.
“While falling interest rates are in general are positive for equity , we believe it is important for utility stocks such as Power Grid and NTPC to offer a spread over G-sec with a re-set 2.5 years away (from FY20),“ said the CLSA note. Power Grid and NTPC show that a 50 bps decline in the risk-free rate can lead to an 8-10% rise in their DCF valuations.The global investment bank raised its target price for Power Grid to `215 from `200 earlier, which translates into an upside of 18.8% from Friday’s closing price of `180.90 on BSE.
On NTPC, CLSA maintained an underperform rating but raised its 12-month target price to `165 on reduced risk-free rate (7.25% vs 7.5%).
Global utility stocks have had a good run since 2009 on declining interest rates in developed markets and investors looking for yield or safe haven investments. The index of US-based utility stocks (IXU) has doubled since January 2009, as 10year treasury yields have halved from 3% to 1.5% in the US.
“We see similar behaviour in Indian utility stocks. This is partially evident from the 28% and 16% rally in Power Grid and NTPC shares, respectively , since the beginning of 2016,“ said CLSA. “We are not surprised by this upward move in Power Grid given its strong EPS growth over FY16-18. The rally in NTPC suggests the market is pricing in a decline in risk-free rate in India’s regulated utility stocks.“ — Neal Bhai Reports