Power push: NTPC, Power Grid top picks

Timely execution and ability of discoms to provide uninterrupted power hold key for demand

The ‘Saubhagya’ scheme, which aims at providing household electrification is positive for improving demand. While there is surplus power supply in the country, demand is lagging, impacting profitability of producers. Given this, addition of new customers would help.

For complete benefits to come through, timely execution, ability of distribution companies (discoms) to provide uninterrupted power and a paying customer base would be crucial. Thus, the Street will also remain watchful. For profitability growth and sustained demand momentum, a higher share of the more remunerative commercial and industrial segment is important.

Sabyasachi Majumdar, senior vice-president and group head at Icra Ratings, says the launch of the scheme shows a thrust on rural electrification and if implemented in a time-bound manner, it is likely to boost energy demand. Majumdar also highlighted that while energy demand growth in the first five months of FY18 had improved (up 5.4 per cent year-on-year), a sustained demand recovery is still awaited. This shows that near-term concerns still prevail.

The concerns are not only over demand, but also on tariff. While a tariff-based auction for wind power at Rs 3.5 per kWh in February 2017 was down from the lowest regulatory tariff of Rs 4.2/kWh, solar tariffs, too, hit a new low of below Rs 3.0/kWh in May. This has put pressure on overall realisations. Nevertheless, NTPC still stands out, as analysts see its return ratios expanding, with expanded capacities going on stream leading to re-rating.

CLSA says it has a ‘buy’ on regulated utilities stocks. Its top picks include NTPC and Power Grid Corp. It says the key is not the scheme but its implementation and thinks India needs on-ground political will and viable business models for discoms.

The Rs 16,000-crore outlay for the scheme can result in benefits for transmission infrastructure companies and some capital goods players. For the transmission infrastructure players, the Street and analysts will be watchful on new order flows.

Analysts say various firms in the infrastructure space are factoring in strong transmission-related benefits coming not only from electricity distribution, but also from the railways segment. Thus, any upswings in fresh order flows will be a fresh trigger. The benefits to transformer makers will come through, but for that initial infrastructure needs to be completed, says India Nivesh’s Santosh Yellapu, who feels Power Grid will be the first one to benefit.