Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now


You can switch off notifications anytime using browser settings.
11,856.80-80.7
Stock Analysis, IPO, Mutual Funds, Bonds & More

Power Grid, NTPC seen as safe havens as yields slip

The stocks of Power Grid and NTPC have a beta of less than 0.8 reflecting lesser variability in return compared with the benchmark index.

, ET Bureau|
Updated: Aug 30, 2016, 08.32 AM IST
0Comments
According to analysts’ estimates, a drop of 50 basis points in risk-free rate could increase the valuation of Power Grid and NTPC by 8-10% based on the discounted cash flows method (DCF).
According to analysts’ estimates, a drop of 50 basis points in risk-free rate could increase the valuation of Power Grid and NTPC by 8-10% based on the discounted cash flows method (DCF).
ET Intelligence Group: The yield on 10-year G-secs has fallen 60 bps year-to-date, driven by a combination of global and domestic factors. A fall in interest rates is positive for regulated-return utilities such as Power Grid and NTPC since it increases the spread of their return on equity (RoE) over fixed-income securities.

Due to relatively stable and regulated RoE of 15.5%, utility stocks offer a safe haven to investors during bouts of market volatility. The stocks of Power Grid and NTPC have a beta of less than 0.8 reflecting lesser variability in return compared with the benchmark index.

Investors evaluate RoEs of utility companies with respect to bond yields and if the spread between the two widens, the relative attractiveness of regulated utility stocks over the fixed income increases.

According to analysts’ estimates, a drop of 50 basis points in risk-free rate could increase the valuation of Power Grid and NTPC by 8-10% based on the discounted cash flows method (DCF). This is because lower bond yield reduces the risk-free rate for the computation of the stock valuation by the DCF method.

CLSA, in a recent note, raised target price for Power Grid to Rs 215 from Rs 200 and that of NTPC to Rs 165 from Rs 155 after it reduced their risk-free rate assumption to 7.25% from 7.5% earlier. Power Grid and NTPC have gained 28% and 16%, respectively, on the bourses since the start of 2016.
Comments
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links


Follow us on


Download et app


Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service