Power stocks to stay charged as heat wave sweeps India, say analysts

Power distribution companies, such as Torrent Power, Tata Power, NTPC, and CESC, are expected to reap benefits of increasing power consumption

As temperatures soar across the country, amid searing heat wave, analysts see power demand hitting fresh record highs this year. The time, therefore, may be opportune to add related stocks on dips as higher demand boosts earnings visibility, they said.

On April 18, India's electricity demand touched a new high of 216 gigawatts. On the consumption front, India clocked a peak energy demand of 4,836 million units that day, an increase of eight per cent over last year.

In just the first fortnight of April, energy demand has risen by 23 per cent, indicating a sharp rise in use of cooling equipment.

"Summer heat will only get worse, going forward. Since economic activity continues to remain strong, power demand for commercial and industrial users will also remain high. Therefore, power demand will remain robust going forward," said Dr VK Vijayakumar, chief investment strategist at Geojit Financial Services.

According to rating agency Icra, the full-year power demand growth for FY23 is expected to remain at 9.5-10 per cent, while the demand growth is estimated to be in the range of 5.5-6 per cent in FY24, due to high base of the previous year.

Peak power demand is pegged at 225-230 GW for FY24, with expectations of a sharp rise in demand during the summer season.

Given the spurt in power demand, Vijayakumar of Geojit Financial Services said shares of Tata Power and NTPC stand to benefit, and investors could use the weakness in the market to buy fundamentally strong companies, he said.

Echoing similar views, Vinit Bolinjkar, head of research at Ventura Securities added that growth outlook for NTPC remains robust as the power ministry has asked the company to operate all the gas-based power plants to full capacity to generate 5,000 MW of additional power during the summer season.

“In Q4FY23, NTPC’s revenue is expected to grow by 21.3 per cent YoY to Rs 45,000 crore, owing to increased growth in regulated equity, higher generation from gas-based power plants, and the commissioning of renewable projects. Ebitda, and net profit is likely to grow by 13.7 per cent to Rs 13,000 crore, and 5.8 per cent to Rs 5,500 crore, respectively,” he said.

Overall, Bolinjkar said NTPC is expected to report revenue of Rs 176,954 crore in FY23 (up 33.4 per cent YoY), while Ebitda, and net profit are seen at Rs 46,982 crore (up 16.4 per cent YoY), and Rs 17,750 crore (up 5 per cent YoY), respectively.

Analysts said power transmission companies may not get any direct benefit from the peak power demand, as their revenues are based on a fixed annuity model, power distribution companies, such as Torrent Power and CESC, are expected to reap benefits of increasing power consumption.

On the bourses, shares of related companies have traded mixed over the past two months. While those of Reliance Infrastructure, JSW Energy, and Torrent Power have surged in the range of 8 per cent to 24 per cent, shares of NTPC, Tata Power, CESC, and BF Utilities have slipped up to 8 per cent.

By comparison, the Nifty50 index is up 1.6 per cent during the period, while the Nifty500 index has added 2 per cent, ACE Equity data shows.

Analysts say the markets are not yet pricing-in the positives that the companies would accrue due to higher demand.

“We are positive on the sector, as power firms under our coverage are likely to deliver better performance in Q4. Besides, the demand will likely surge in the next 6-7 months, driving further gains,” said analysts at Elara Capital.

They said the regulatory support for companies is very constructive across India, thus providing a multi-year smooth runway to growth, boosting earnings-per-share outlook over FY23-FY25.

The brokerage has an ‘Accumulate’ rating on Power Grid (target: Rs 240), and ‘Buy’ ratings on NTPC (Rs 209), Tata Power (Rs 272), and SJVN (Rs 54).

Emkay Global, too, has ‘Buy’ ratings on NTPC, NHPC, CESC, and Power Grid Corporation with target prices of Rs 200, Rs 51, Rs 101, and Rs 250, respectively.