Power Tariff Analysis – A perspective on JSW and Suzlon

                            By Vishwanath Pandey

TAPMI- PGDM 1st year, Sec 1

After the dual shock of Demonetisation and GST, the power sector finally showed some signs of recovery this August. The industrial output which showed negative growth in June 2017 due to GST had negatively impacted the bottom lines for power majors.

With the spot power rates spiking up to INR 9 per unit, the power companies could recover some of their costs.  More importantly power demand has shown a gradual improvement since the implementation of GST on July 1st. The demand grew by 5.3% in July and 6% in August. This was a result of unusually warm weather in the northern states as well as the rise in the industrial output of the country.

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Figure 1: Increasing production levels of electricity helped boost the losses

Because of this industrial activity the average spot power tariff has increased to around INR 3-3.5 per unit, which is 75 percent higher than the average levels of INR 2.19 per unit seen in August last year. This increase of about INR 1 may seem marginal but for power generating units its nothing short of a wind fall. For companies like JSW Energy that has close to 6000 MW of power generation capacity, a one-rupee improvement in the overall realization would mean an annual increase of INR 2454 crores in sales based on annual generation of 2454 crore units. This is an incremental growth of 30 percent on FY17 sales. This additional income which after tax deduction is about INR 1717 crores would add to company’s profits. JSW made a profit of INR 622 crores in FY17.

Suzlon Energy is another company enjoying the benefit of this resumed demand as well as greater emphasis on green technology. In FY17 it saw a 49% increase in delivery volumes to 1682 MW, including 109 MW in solar. The company earned revenues of INR. 12,693 crores as well as 64% growth in its EBITDA. Suzlon is banking upon high volume delivery instead of high per unit price to maintain its profitability. They plan to sell power at INR 3.50 per unit when the market size reaches 10 gigawatts.

Therefore, based on these current trends the companies to look out for in the power sector, would be –

  • JSW Energy
  • Suzlon Energy
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#Fincabulary 22 – Takeout Value

MeaningThe estimated value of a company if it were to be taken private or acquired.

A firm’s takeout value considers various metrics, such as cash flows, assets, earnings and multiples used in similar takeovers. The mergers and acquisitions environment can also affect the takeout value of a company. There is no exact formula for takeout valuation, since a variety of metrics, such as EBIDTA multiple, P/E ratio and even firm-specific information can be taken into account. The value is used by both financial analysts and shareholders. The analysts will use the valuation to determine a range of possible price levels for takeover bids, while shareholders can estimate how much return they might receive if their shares are acquired.

WHAT MAKES AN INVESTOR TICK?

-By Shruti Dhumal & Ryan Rego (SIES College of Management Studies, Mumbai)

INTRODUCTION

Conventionally under traditional finance, it is assumed that people are rational and make logical decisions while investing and that they are unbiased when it comes to determining the price of a security.  However, that is not usually the case. There are certain psychological and emotional factors that influence investors. Many times, investors derive their own set of rules that supposedly govern the movement of a particular stock which is also known as heuristics.

Behavioural finance is a field that combines psychology with economics and finance to try to provide explanations as to why a person takes an irrational decision

ROLE OF BEHAVIOURAL FINANCE IN STOCK MARKET

It can always be seen in the stock market that emotions and not the fundamental or technical changes are the reasons for the sudden short-term changes. It might be observed in such cases that whenever an analyst is questioned as to why the market was up/down, he/she doesn’t have a specific reason. It’s actually the euphoria or fear amongst the people that drive the market. Investors think irrationally and tend to make cognitive errors. Due to this tendency, it can be concluded that markets cannot be efficient when it comes to information.

Investor’s emotions and their behaviour play an important role in every step of their investment portfolios. At the time of portfolio building, it is important that investors discard their traditional heuristics of their wealth building processes. For long-term investments, it is necessary that the investors have long term perspective rather than short term emotion driven decisions. Sometimes people tend to react collectively because the others are behaving in a particular manner. It could be due to the occurrence of sudden events such as the Brexit. All such reactions are short term and people should not be carried away by the collective emotional decisions of the crowd.

Hence, wisdom is accepting the reality rather than thinking how it should have been.

Shruti

Figure 1: Sensex growth May-June 2017

The above graph shows the Sensex graph for the month of May 2017. One can clearly see a drastic rise in the Sensex since 25th May 2017 and 2nd June 2017. The stock market has been attaining new heights every day. And every moment we tend to see more euphoria driven results.

One can notice a similar phenomenon in the Bitcoin market; one of the main reasons for the Bitcoin boom is that it has been hyped up to a great extent.

An increasing number of investors are also hopping on the Bitcoin wagon and investing due to the fear of missing out on opportunities. This drive creates more momentum thus creating a snowball effect. Bitcoin prices shot up by more than 120 percent in 2017, after gaining 125 percent growth in 2016. Recently Bitcoin has been increasing in the 4000 and 5000 level which is a whopping growth rate.

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Figure 2: Bitcoin prices’ variations

On 29th August, 2017 Mumbai faced a heavy downpour followed by floods and the citizens were panic-struck. This incident instilled fear in the minds of Mumbaikars, because of which they opted to stay home the next day despite there being no rains. This is a typical behaviour observed even in the case of investors during market cycles-sell when there is panic in the market, but don’t buy when share prices have reached an all-time low because of fear.

Another example would be the recent missile firing by North Korea towards Japan. Japanese markets were down by only 0.45%, India’s Sensex on the other hand, fell down by 1.2%.Behavioural finance also explains the occurrence of asset bubbles, one of the most famous bubbles that occurred was the American housing bubble in 2006.

CONCLUSION

Behavioural finance tries to identify and study the irrational behaviour of the masses with the hope of correcting such irrational behaviour.It also seeks to provide measures to identify and possibly prevent asset bubbles from occurring and curb the unwanted speculations which ultimately lead to losses.

Enigma of Twin Deficits!

By – Ishan Kekre

The problem of twin deficits has pestered past Indian governments and was a problem of grave concern for the UPA-2 government. Without further ado, I would like to talk about what twin deficits really are? The twin deficit comprises of fiscal and current account deficit. The fiscal deficit is the total debt generated by the government to finance its expenses. It shows that the government has no other option other than borrowing. PIIGS countries are an example of how high fiscal deficits can lead a country to bankruptcy.

When the fiscal deficit is high, it implies government has to borrow heavily, meaning demand for loans will rise in the market leading to higher interest rates and higher cost of borrowing. Private firms shy away from loans and even pull out from existing projects as loans are costly. This has an adverse impact on employment and income. This phenomenon refers to as ‘crowding out’ of private investments. The FRBM act (2003) mandates every central government to restrict its fiscal deficit to 3% of its GDP.

On the other hand, current account deficit or C.A.D is the situation where imports are significantly greater than exports leading to a negative balance of trade. It is therefore also known as trade deficit and has a substantial impact on G.D.P of a country.

The linkage between the two deficits is critical. Under heavy fiscal deficit, the government borrows from credit market and then from foreign sources. Due to high demand and opportunity to make a profit, institutions from abroad supply funds. This lead to currency exchange by foreign firms leading to an increase in demand for the Indian rupee. Hence, rupee appreciates making exports expensive and imports cheaper. Hence, imports start exceeding exports leading to a higher trade deficit for the country. Thus, a high fiscal deficit can lead to a very high trade deficit for the country and together they are called the ‘Twin Deficits’!