Power sector stocks may see lot of volatility even as demand remains strong

Cost of inputs and funds, working capital needs and sales-mix key factors to influence prospects

There are conflicting trends in the power sector but the overall impression is that the sector is coming under pressure. The inflationary impact of the Ukraine War, on petroleum, natural gas and coal has driven up the cost of thermal power. But the economic recovery continues, albeit at a slower pace, which means that demand is rising. But domestic coal shortages and high imported prices could affect generation.

The RBI decision to hike policy rates will also have a negative impact and its supply chain. Given the financial stress in state-run discoms, power generators and suppliers like Coal India have to contend with high receivables. This means they will have higher costs of financing as interest rates rise.

Valuations of the conventional power sector will see a lot of volatility. Different generators have different profiles. Some proportion of power is sold on a pass-through basis which makes it cost-neutral. Some merchant power is sold on exchanges, and the cost of merchant power units are expected to stay up.

Gas-based generation is out of the picture given record gas prices. Some generators source imported coal, or buy coal at auction instead of at controlled prices – their costs will escalate much more than for those with purchase agreements. The power exchanges and Power Grid Corporation will see higher toplines and presumably, higher bottomlines since their businesses depend on volumes. Interest in renewables has grown as conventional power has become more expensive.

Power demand is expected to grow by 8-9 per cent year-on-year (YoY) in Q1, 2022-23 and merchant power is likely to be sold at averaged rates of Rs 6 per unit or higher through April-June 2022, which would be a five-year high. March saw merchant units spike briefly to Rs 8. Roughly 34 GW out of around 73 GW of private thermal capacity is expected to be sold as merchant power.

In March 2022, IEX traded unit volumes were up by 16 per cent YoY and overall, unit volumes were up 38 per cent in 2021-22 versus the prior fiscal. The daily peak demand in Jan-Mar 2022 averaged out at 187 GW, while the first half of April saw demand upto 194 GW. The peak demand last calendar year was 200 GW in July 2021 and this may well be exceeded. Industrial belts may suffer from coal shortages which result in power outages.

Unpaid dues by power generators to Coal India have arisen due to unpaid dues of discoms to generators. Around Rs 1.3 trillion is outstanding in receivables from state-owned discoms to generators –about 20 per cent higher year-on-year. Coal India’s receivables have also mounted since generators are struggling to pay as a result. The Centre and states have to work this out and the industry is hoping for another bailout.

In renewables, against targets of 60GW of ground-mounted solar capacity and 40GW of roof-top solar by 2022, about 38.81 GW and 5.5 GW respectively has been installed. Wind Energy capacity growth has also been slow.

The market volatility reflects these trends. While NTPC (which has pass-through and guaranteed thermal supplies) is up 1.3 per cent and Power Grid (which gains from higher volumes) is up 5 per cent in the last month, Tata Power is down a whopping 21 per cent and Adani Green, which has been a multi-bagger is down 6.5 per cent. IEX has seen a drop of 18 per cent.