If the world is so obsessed with ESG, how come the non-ESG dominated stocks like Coal India and NTPC are making a comeback?
It is a combination of a number of factors in the case of power utility companies. Last year, because of the lockdown, there was very low demand for power — both corporate and consumer. As the unlocking is happening, globally there are supply side issues — not just for coal but also for natural gas and oil because these are various heating elements. There has been a huge surge in the price of national gas worldwide and therefore some of the utilities worldwide are shifting to coal. Alongside, coal prices have gone up. NTPC as a market leader is seeing demand coming back, the valuations are very attractive at about 1.1 times book value of a company of its size.
Today roughly about 10% of a portfolio is moving towards renewable energy. So a lot of actions are happening and companies are becoming ESG compliant. But it is important to remember that even if we fast forward another 15-20 years, oil will continue to cater for 40 to 50% of the entire energy requirement globally. Also coal utility will continue to play a very important role now.
All utility companies which have linkages to coal such as Tata Power, NTPC will get higher valuations and in any case, their valuations are very attractive. So there’s a combination of demand coming back, worldwide disruptions and alternative energy sources. There is an expectation that NTPC is moving towards smart meterings. Smart metering is to lower the ATC losses that happen because of various reasons.
When smart metering happens, they can pinpoint who is using how much power. A combination of structural initiatives plus situational ones is causing this run. There is still some leg up left in the sector.
So which one would you go for — NTPC, Coal India, Power Grid?
NTPC clearly because while coal is still the mainstay, solar is above 10%’ valuations are still on the upside, utilisations are still very low, in the 70s. So it has operating leverage and therefore the profit margin will be high. So, NTPC still looks attractive at current levels.
What are you looking at buying on a decline from the IT space?
In the IT space, all the names continue to look good. The relative valuation of Tech Mahindra, HCL Tech might be cheaper than Infosys and TCS but we like all of them. Also the second line companies like MindTree are extremely well placed. In the cloud-based world, each company needs to get itself accreditations and to qualify to participate in biddings.
From that perspective, TCS has the highest number of activations, even higher than Infosys and HCL Tech. So at the end of the cycle, they will win big orders faster than the other large companies. TCS continues to look good but so do the other IT companies; HCL Tech and Tech Mahindra.
The IT stock valuations have run up a lot. In the last couple of days, we have been seeing them underperform. Long term, it looks good. Is this just an aberration that we are seeing?
Indeed. There is a market rotation and we need to be aware of that. The stocks have done very well and hence there has been a certain rotation away from these stocks. The growth is still intact though for the long term investors. Even at current levels, in the next coming quarter, the numbers are likely to be very good and there is a very good chance that they will beat expectations fairly strongly. Part of it is reflected in the valuations but we need to recognise that new technologies like SaaS will add much more revenues to Indian IT services companies. So there are strong legs of growth and they all look attractive.
