Brighter prospects ahead for power sector stocks amid economic momentum

Though there are a few monitorables, rising consumption should drive up volumes, investment

Power consumption is closely linked to economic activity and the data indicates that power consumption is likely to rise substantially through FY24 and also in Q4 of FY23. Power consumption in January 2023 rose by a huge 18.4 per cent year-on-year (YoY) and 6.2 per cent month-on-month (MoM), albeit on a low annual base (January 2022 was up only one per cent YoY).  

If this trend continues, there will be an investment focus on utilities and the power supply chain. Investors will also have to study the expansion of receivables up and down the chain, since the sector has a persistent problem with outstanding dues from state utilities, and since this has a political component, it could be hard to deal with it, in a year with multiple elections. That apart, the power sector should see steady rise in generation volumes.

India’s current installed capacity of hydropower, thermal and renewable energy (RE) stood at 46.8 Gw, 235.8 Gw and 120.9 Gw, respectively (with 63.3 Gw in solar and 41.9 Gw wind), as on December 2022. The RE capacity target is 500 Gw by 2030. Given strong balance sheets, generators such as NTPC and Tata Power should do well. The Hydro players NHPC and SJVN could also do well since both have reasonable balance sheets and plans to add RE capacity.

Coal-based thermal generation grew sharply by 18 per cent YoY in January 2023, hydropower generation grew 9.4 per cent YoY (over a negative growth of minus 5.8 per cent YoY in January 2022). Other renewables (apart from hydel) shot up by 32.8 per cent YoY due to capacity additions. Solar and wind generation surged 13.3 per cent MoM and 25.3 per cent MoM, respectively. Gas generation dropped 3.4 per cent YoY in January 2023 versus a 35.4 per cent YoY fall in January 2022. High gas prices will constrain gas-based generation. The RE share in overall generation rose to 11 per cent in January 2023 from 9.8 per cent up YoY in January 2022 and 10.3 per cent YoY in December 2022.

The strong power demand indicates there is genuine momentum to economic activity. If global warming and El Nino contribute to excessively high temperatures, the demand will be even more. Even if we discount the seasonal and climate factors, GDP growth at somewhere between 6.5-7 per cent should translate into mid-teens growth for the power sector.

The government has already invoked Section 11 of the Electricity Act 2003 between mid-March 2023- to mid-June 2023, to ensure that thermal plants running on expensive imported coal should continue to operate, even if there are bankruptcy proceedings in process. Admittedly global prices of imported coal have moderated. If cost pass-through is allowed, facilities such as Tata Power’s Mundra plant, which use imported coal will do well.

Apart from generators, other players along the value chain such as Power Grid Corporation and listed power exchange, Indian Energy Exchange (IEX), will see volume expansion. Merchant power players such as at JSW Energy are also likely to do better if there’s elevated demand leading to high volume and better prices at power exchanges.

Thermal generation remains the single largest contributor and Coal India and Neyveli Lignite (NLC) are likely to be beneficiaries of this. For Coal India one key variable will be how much of its production can be sold at e-auction (market-driven prices) and lower imported coal prices could put a ceiling on auction realisation.