Increased capex, focus on clean energy, and a strong order book will further boost power stocks. In a market where stock prices are currently near their peak, power stocks with reasonable valuations and a history of consistent dividend payments could be appealing to long-term investors.
Power stocks have transitioned from a state of inactivity to becoming one of the more sought-after stocks. A rally in the broader market has also pushed investors to look for value in hitherto unnoticed or dormant pockets, such as the power sector.
The momentum is evident from the recent surge in stocks like NTPC, JSW Energy, PFC, REC, and SJVN, among others.
Why the sudden buying interest?
“The power index has risen nearly 10 percent in a month, mainly due to a surge in electricity demand,” said Raj Vyas, VP of Research, Tejimandi.
On August 31 2023, power demand reached an all-time high of over 236 GW, surpassing the previous record of 234 GW set on August 17, 2023, and exceeding the power ministry’s estimate of peak demand of (added) 230 GW, he added.
In the last two weeks of August, India averaged a daily power demand of 233 GW, Vyas explained.
Anchal Kansal, Research Analyst, Green Portfolio, also attributed the recent upswing in power stocks to strong power consumption data in August, which grew 16 percent year-on-year (YoY).
The increase in power demand can be attributed to low rainfall because of El Nino, heat waves in Rajasthan and Uttar Pradesh, and higher power consumption by manufacturing industries.
Also read: NTPC, Power Grid hit all-time high; JSW Energy gains 5% on high volume trade
El Nino reduces the availability of hydroelectricity while increasing the dependence on thermal power, and triggers an increase in power demand due to increased residential and agricultural needs (e.g., greater dependence on irrigation due to lower rainfall, air-conditioning, etc.).
Vyas also said was that via a notification, the government has encouraged certain gas-based power plants to operate at full capacity. “This reinforces the belief that the demand for power is expected to remain robust,” he said.
Increased capital expenditure, focus on clean energy, and a strong order book will further boost power stocks. In a market where stock prices are currently near their peak, power stocks with reasonable valuations and a history of consistent dividend payments could be appealing to long-term investors.
Renewable energy
Power stocks have gained greater confidence thanks to the expansion of renewable energy (RE) projects and increased capacity utilisation driven by strong demand.
According to Naveen KR, smallcase manager and Senior Director, Windmill Capital, a majority of the uptick in the power sector has been because of its RE push.
“International investors have flocked into this space from an ESG angle. ESG investors look to park their money in companies or sectors that are conscious of environmental, social, and corporate governance issues. With power companies leading the RE space, it fits well with the ESG theme,” he explained.
Many private electricity companies have been making news for their incremental renewable energy capex.
Kansal is also of the view that a shift towards RE and the government’s focus on hydrogen and solar energy has worked well for these stocks. Production-linked incentives (PLI) for the manufacture of solar modules and energy storage systems, and the issuance of green bonds, were among the notable announcements of Budget 2023.
A pact was also signed at the recent G20 summit by member countries to be net-zero by 2050, Kansal said, adding that being one of the fastest developing countries, increase in construction, manufacturing, and services has led to an increase in the demand for power in India.
“A 70 percent increase in power demand is expected in India in the next decade,” said Kansal.
“Power generation, transmission, and distribution investments should rise 2.2 times to $280 billion in FY24-30 vs FY17-23,” says Jefferies.
Also read: India unlikely to touch 240 GW power demand again in 2023
Fundamentals and valuations
However, Naveen KR cautioned that fundamentally, not a lot has changed within the power sector. Usually, it is seen that these companies have high debt on their books, given the capital intensive nature of the sector. As a result, their balance sheets remain highly leveraged. Secondly, high capex leads to high depreciation in their books, which compresses the Return on Equity (ROE).
But he also said, “As far as valuations are concerned, even post the recent rally, most power stocks have not run up much and continue to trade in a comfortable band.”
Kansal said he holds companies like CESC and JSW Energy in his portfolio, which have run up quite well in the last six months.
JSW Energy’s green hydrogen plant and energy storage battery unit have triggered good movement in the stock, and the management has upped the financial projections by almost 25 percent.
Jefferies has identified more than 50 listed companies that could benefit from rising investments in power generation, transmission, and distribution. NTPC, Power Grid, and JSW Energy are its top picks.
SJVN and Adani Green have plans to grow installed capacity at a compounded annual growth rate (CAGR) of over 20 percent in the future.
The potential for monetisation through stake sales or IPOs over the next 2-3 years, as additional assets are deployed, serves as an added catalyst for the sector. As the renewable energy portfolio grows in scale, Jefferies anticipates that the stocks will be re-rated.
Meanwhile, NHPC and JSW Energy plan to expand capacity by a CAGR of 12-16 percent by 2040 and 2030, respectively, which excludes the energy battery storage and pumped hydro storage plans for JSW Energy. Power Grid and Adani Energy Solutions should benefit from accelerated growth in transmission spends.
According to Jefferies, Power Grid’s valuation depends on the capex growth of the company. Over FY17-21, the stock was de-rated despite rising capitalisation and earnings due to slower capex growth. However, in the past three years, a surge in the bid pipeline suggests higher upcoming capex, which should lead to its re-rating.
“We believe visibility of a healthy transmission bid pipeline remains, as RE capacity addition is taking off,” it added.
Outside of these companies, REC and PFC, Apar Industries, KEC International, Kalpataru Projects International, L&T, and Siemens are also beneficiaries of the surge in the power sector, Jefferies said.
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