Stocks of several power companies and suppliers have shot up sharply over the last few months, in some cases as high as 150 per cent.

What explains this exuberance when there's no change in the fundamentals? Are the valuations justified?

Worldwide, utilities are amongst the least fancied stocks by investors. In India, the power market has been controlled by state electricity boards and tariffs are driven by political rather than economic considerations.

Power projects always offered good returns in an industry in which demand far outstrips supply. What's different now is the scale of projects on offer for private sector investment and a critical reorientation of the nature of the market .

Let's look at the investment first. With a demand-supply gap of 12 per cent, the country has set an ambitious capacity addition target of 78,577 Mw of power-generating capacity in the next five years, a significant proportion of it by the private sector. .

Generation will attract the bulk of the investments (Rs 5,00,000 crore or Rs 5,000 billion) in the next five years. The transmission and distribution sectors, which have been ignored in the past, will also see investments of Rs 140,000 crore (Rs 1400 billion) and Rs 170,000 crore (Rs 1,700 billion) respectively.

Reliance Energy Ltd [Get Quote], whose stock has been a star performer, plans to invest Rs 60,000 crore (Rs 600 billion) to take its capacity to 15,000 Mw in the next five years, Tata Power [Get Quote] plans to add 10,000 Mw during the same period, including the ultra-mega power project at Mundra.

REL, in fact, has bagged two of the government's 4,000 MW ultra-mega power projects in Sasan, Madhya Pradesh and Krishanpatnam in Andhra Pradesh.

''The private sector feels there's a good chance of getting good returns by investing in power,'' said R Chandak, managing director of KEC International [Get Quote], which supplies transmission towers to utilities.

''Investors realise that companies are in for a period of high growth. Companies that were generating 2,000 Mw will now be doing projects of 4,000 Mw each. This will create top-line growth,'' said Adi Engineer, an industry expert who also serves on the board of Tata Power.

These projects or UMPPs can also provide stable profits for 25 years (power projects are permitted assured returns of 14 per cent on equity under the government's tariff policy).

 ''A UMPP of 4,000 Mw can generate a net profit of Rs 560 crore (Rs 5.6 billion) to Rs 800 crore (Rs 8 billion) for 25 years, based on the return you target. How many businesses can provide you that kind of profits without vagaries of market fluctuations for 25 years at a stretch,'' said Venkatesh Babu, managing director, Lanco Infratech [Get Quote]

UMPPs and other power projects that are granted coal linkages are in a particularly strong position.

A total of 53,000 Mw of capacity will come up on coal in the eleventh plan, and all these projects will be provided coal linkages, according to a power ministry official.

The Centre's UMPPs, some of which come with coal-linkages, initially excited bidders because they don't have to run from pillar to post to get approvals.

The Centre created a shell company that secured all the approvals.

This in itself is considered a huge upside. As Dhaul puts it, "Investors are no longer looking at dividends but at business valuations or how difficult it would be for someone to rebuild this business today.'