Power stocks may rebound on demand recovery, attractive valuations

Power stocks, down over 22 per cent in the past year, may see renewed interest in H2FY26 as demand recovers, coal capacity expands and renewable additions accelerate

Utilities in the power sector present an interesting investment case at this moment. Most power stocks have lost substantial ground in the past 12 months. FY25 results were moderate and Q1FY26 results were poor, with lower-than-expected peak and base demand.

 

A recovery in demand in H2FY26 could trigger investment interest at current, reduced valuations.

 

Amidst long-term trends, there are plans to increase coal thermal capacity and also a pickup in battery energy storage systems or BESS (and pumped storage plants or PSP) to meet long-term peak demand as more intermittent renewable capacity is wheeled onto grids. The dependence on external components for BESS and solar also implies India is exposed to geopolitical, supply-chain risks.

 

The demand weakness of FY26 till date has been weather-induced with excess rains leading to lower cooling needs. The long-term demand trajectory remains strong. Projects under planning and in various stages of progress indicate coal thermal will add 86Gw between FY25-35, up from earlier estimates of 68Gw. Equipment ordering for at least 26Gw of this capacity may take longer than estimated, extending timelines.

 

The BESS capacity addition is being supported by viability gap funding schemes and waivers of interstate transmission charges. PSP capacity targets are unchanged at 32Gw by FY32. Many PSP projects will enter the execution phase soon giving a clearer picture of timelines.

 

A demand uptick in H2FY26 may lead to renewed interest in beaten-down power stock. Incidentally, NTPC is looking to start a $6 billion nuclear power project soon. Inexpensive regulated utilities- NTPC, NHPC and CESC- may do better than merchant power-oriented plays like JSW and Tata Power.

 

Apart from NTPC’s nuclear plans, NHPC could see a steady earnings growth of 20 per cent or more per year due to the launch of large hydro projects, and CESC is looking at entry into solar modules and cells with a solar module plant starting in Q3FY26. JSW Energy may see some earnings per share or EPS downgrade due to the weak merchant power market.

 

Investors in NHPC may also be conservative due to the impact of floods. SJVN may see a delay in its large hydro projects and it has not yet completely tied up coal for its new thermal plant.

 

FY26 to date has witnessed subdued power generation, with demand growth of just 0.6 per cent year-on-year (Y-o-Y) up to August 2025. Power generation was up 3 per cent between September 1–18. October demand will be a key monitorable.

 

Coal inventories remain at around 20-plus days of supply vs 14-plus a year ago, which has moderated offtake for Coal India (volumes down 4 per cent Y-o-Y till August ‘25). Market pricing on exchanges is weak, with day ahead market tariffs lower by 18 per cent Y-o-Y in September. Valuations are down with most sector stocks trading between 2.0–2.2 times price to book value or PBV, which is 35–40 per cent below recent peaks. The BSE Power Index is down over 22 per cent Y-o-Y.

 

On the supply side, performance is strong. Hydro generation is up 9 per cent Y-o-Y, solar and wind have grown by 25 per cent, and 9 per cent Y-o-Y, respectively. Thermal generation was flat. The mix shows a focus on clean energy. Stable nuclear availability if it occurs would also be a positive.

 

Total installed capacity reached 496 Gw (August 2025), with addition of 45 Gw over the past year. Renewables accounted for 89 per cent of incremental capacity, raising the renewable share in overall capacity to 39 per cent. Coal India’s volume offtake was up 9 per cent Y-o-Y for August ‘25 with a base effect, after underperformance earlier in FY26, where CIL had degrowth of 6 per cent Y-o-Y. Captive and commercial coal production registered 13 per cent Y-o-Y volume increase. Imported coal prices remain soft.

 

Apart from generators, power grid remains a key player as transmission investments are a given and the PSU dominates the transmission segment.