Analysts see more steam in power stocks as India eyes harsh summer

The upward trajectory of the stocks of power-generation companies (gencos) is expected to continue, say analysts, as the impending severe summer heat is likely to drive up demand for electricity.

India’s peak power demand is projected to increase by at least 7 per cent year-on-year (Y-o-Y) in 2024, reaching 260 gigawatt (Gw), based on forecasts by the Central Electricity Authority, the governmental think tank focused on the electricity system’s development.

According to Anirudh Garg, a partner and fund manager at Invasset, India’s peak electricity demand is set to significantly rise from the record high of 243 Gw in 2023. To support this increase, he mentions, the government plans to enhance the energy infrastructure by introducing at least 20 Gw of new coal-fired capacity.

“The outlook for the power sector remains robust for 2024, with a focus on growth, strategic shifts, and technological innovation,” observed Garg. In the stock market, power gencos have significantly outperformed both the benchmark National Stock Exchange Nifty50 and the broader Nifty 500, according to ACE Equity data.

Stocks such as Adani Power, RattanIndia Power, Gujarat Industries Power Company, Torrent Power, NHPC, Tata Power, and NTPC have seen their values increase by between 99 per cent and 220 per cent over the past year.

In comparison, the NSE benchmark rose by 27 per cent, and the Nifty 500 by 37 per cent during the same period.

To support demand, the government is considering implementing a lower renewable generation obligation (RGO), potentially reducing it to 6–10 per cent from the current 40 per cent for new coal and lignite power plants, to encourage thermal power generation, according to reports. The RGO specifies the minimum renewable energy generation capacity needed to ensure a guaranteed power supply. HSBC’s analysis indicates that demand for thermal power has increased by 5 per cent Y-o-Y and 9 per cent quarter-on-quarter during January–February 2024. Despite occasional spikes on high-demand days, the demand deficit remains manageable. Additionally, the plant load factor for thermal plants has improved by 7 percentage points sequentially and 5 points Y-o-Y to meet demand, as wind and hydropower generation seasonally decreases during this season.

Coal reserves at power plants have also surged by 15 days to 43 million tonnes, marking the highest level in nearly three and a half years.

“Increased economic activities and fluctuating weather patterns, leading to varying heating and cooling demands, will further boost power demand. Although power gencos have performed well in the past year, these stocks are still expected to offer modest returns in the next two quarters,” explained Deepak Jasani, head of retail research at HDFC Securities.

In light of this, Sneha Poddar, associate vice-president for retail research and broking and distribution at Motilal Oswal Financial Services, recommends investors capitalise on dips in power-related stocks, as the potential for further rerating exists.

“The fourth quarter of 2023–24 looks promising for power gencos with an early summer onset in parts of North India and increased use of heating equipment in January. With demand poised to reach new heights this summer, the outlook is positive from a three- to six-month perspective,” she noted.

However, analysts caution that power gencos with existing power purchase agreements may not fully capitalise on the surging power prices due to rising demand. They warn that the recovery of fixed costs, incentives for superior operational parameters, policy shifts, and inconsistent coal supply could pose challenges to the sector. “The biggest risk in the current power demand cycle could be slower-than-expected growth of 0.8–1x of gross domestic product, along with battery economics (commercially viable sodium-ion batteries nullifying coal generation investments). We remain positive, but selective, on the sector. We like NTPC, PowerGrid, and ReNew,” noted analysts at Bernstein.