Power sector stocks may continue to shine as economic activity recovers

Improving earnings prospects led by higher volumes and easing supplies augur well

Power consumption is strongly linked to economic activity. The consumption data through Q3 suggests that economic activity continued to recover in that quarter but at a slower-than-expected pace. On the other hand, supply chain issues seem to be easing and despite the Omicron wave, there’s been speculative investment in various power sector stocks in the last month.

Since mid-December, select stocks across the power sector have outperformed the Nifty50. This is even though power consumption in Q3 had been only 2.5-3 per cent higher year-on-year (YoY) than the corresponding quarter of 2020-21. Generation growth is likely to continue to be low for the next few months.

Coal-based thermal generation was up 4 per cent YoY in December 2021 versus 3.2 per cent YoY in November 2021. Gas generation remained down 43 per cent YoY in December 2021 (down from 48 per cent in November 2021) due to the sharp rise in spot gas prices.
 
Renewables grew 4.6 per cent during December. Hydro generation was up 13 per cent YoY. Renewables generation stood at 9.5 per cent of total generation. All-India conventional capacity addition was at 5.5 Gw in 2020-21 and between April and November 2021, 2.5Gw capacity was added. Peak demand was flat in December 2021.

India’s power demand comprises industrials at 40 per cent, commercial 10 per cent, domestic 20 per cent, agricultural 20 per cent, and others 10 per cent. During the total lockdown of 2020, power demand dropped 15 per cent due to lower demand from the industrials and commercial segments.

After a hitting high of Rs 16 per kWh in October, power prices on the exchange have eased down to Rs 3.3 per kWh. Apart from muted power demand, increased coal supply has played its part. Coal stocks at plant level are now at an average of 11 days (early January) after hitting critical levels of 3-4 days in October. Coal availability was an issue but Coal India increased production in December. This is important given that international coal prices remain high.

Regulated companies — such as NTPC and Power Grid Corporation —may post faster growth for their regulatory business on increased capacity in the coming quarters. NHPC and SJVN may be able to post better earnings growth. Private companies, such as JSW Energy and CESC, may have seen better generation and higher merchant tariffs. The Indian Energy Exchange and PTC should declare good results, given strong volumes even though trading prices fell after October. Coal India may post better results on higher offtake and production volumes. A key issue for NTPC and Coal India will be receivables, which may have climbed.

Tata Power is likely to see strong double-digit gains in revenues and growth in Ebitda. The deleveraging of the last five quarters and the traction in the solar segment are likely to start contributing, alongside the discom acquisition in Odisha. JSW Energy should benefit from better merchant prices. PTC and the IEX will both see revenue and net profit gains based on higher volumes. Torrent Power should also gain on better generation and YoY base effects. Coal India has produced more and received a better premium for its e-auction coal sales. The sector should outperform if the economy continues to recover through 2022-23.