Power utility stocks have caught the fancy of investors and many believe these to be a good buy at this juncture, with the outlook for the sector turning bright.
Power demand in India grew 10 percent year-on-year (YoY) in the first nine months of FY23, with a peak demand of 206 GW, up 12 percent YoY in December 2022.
Power demand and consumption in India are said to grow by 12-13 percent during peak periods, while the nation’s power generation has grown by 9.56 percent during the April 2022-February 2023 period. So, understandably the public sector-owned power plants are ordered by the government to operate at full capacity as demand or consumption increase has outpaced power generation growth significantly.
NTPC’s power generation has grown faster than the country's at 11.92 percent between April-February, Anmol Das, Head of Research, Teji Mandi-subsidiary of Motilal Oswal Financial Services.
Riding the summer wave
“Power utility companies are expected to report double-digit growth for the March quarter as IMD predictions of heat waves across northern, central and eastern India will force usage of more electricity, while industrial usage is already at new peaks,” Das said. Even as industrial usage will peak in March, heat waves will keep retail consumption high throughout the summer, he added.
Read more: Power demand: NTPC to generate 5,000 MW through gas-based plants in April-May
Double-digit growth in power demand is on a high base and the government’s measures to ensure efficient planning of supply are big positives for the sector, said Prasanna Bidkar, a smallcase manager and investment specialist at Rupeeting, an investment management company with long-term investing strategies.
While NTPC has been directed to operate gas-based plants at full capacity, the key problem is their inability to secure fuel. Because of this, out of the 25 GW gas-based capacity in India, more than half ― almost 14 GW ― is not even operational, Bidkar said. However, along with invoking Section 11 of the Electricity Act, 2003, gas supply has also been arranged for NTPC, reflecting the improvement in system planning, and ensuring a practical way of meeting demand, he added.
“Moreover, the ‘turn-on-turn-off’ time being much faster for gas-based power plants, compared to coal-based plants would result in better PLF (plant load factor), and drive an increase in incentive income,” he said. Further, the High Price Day Ahead Market (HP-DAM) has been approved, which will facilitate a selling price as high as Rs 50 per unit, thereby providing relief to generation companies running their plants on natural gas that is costlier, Bidkar said.
Overall, both demand and supply mechanisms fitting in well will ensure no mass power cuts, which will bode well for power utility stocks.
Investment plays
The consistent double-digit growth in power demand and policy actions from the government to avoid any power outages during summer, such as invoking Section 11 of the Electricity Act, 2003, bode well for all utilities with significant improvement in the utilisation (PLF) of thermal power plants, rise in merchant power rates, expeditious execution of power projects (both thermal and renewables), strong focus on energy storage projects in the medium term, and attempts to bring life back into thermal capex, said JM Financial Institutional Securities in its report.
It believes, “The regulated business model of power utilities offers a safe haven amidst the uncertain and volatile environment assuring visibility and stability in earnings. We maintain our positive view on power utilities given steady growth, long-term revenue visibility, and a favourable power demand scenario.”
The sector is growing at a healthy pace in India, with renewables like solar and wind capacities growing in the mid-teens. NTPC has already crossed more than 3 GW of renewable capacity, and has a rich pipeline of upcoming renewable capacity to be added in its portfolio. “Over time, the stock may also be considered higher in the ESG (Environmental, Social, and Governance) framework by foreign funds, while it maintains a high dividend yield of 4 percent. This could be seen worth investing with a long-term view and moderate gains at current valuations,” said Das.
With an upward revision in the outlook for thermal power, along with a reduction in dues from state distribution utilities or discoms, the view on these companies has definitely turned positive, said Bidkar. “Other than the several tailwinds, in current market conditions, we are anyway focussing on companies with a strong asset base. And from that perspective, utilities as a sector certainly becomes worth investing in right now.”
He added, “We like companies which are scaling up capacities to meet growing demand, and operate on a cost plus revenue model, earning the assured ROE (Return On Equity) spread. In this context, we like NHPC, NTPC, and Power Grid.”
In the power sector, JM Financial Institutional Securities believes NTPC and Power Grid Corporation of India are the most stable in terms of returns with more than 90 percent of earnings coming from the regulated model assuring fixed and stable returns.
CESC has long-term Power Purchase Agreements (PPAs) for 95 percent of its 2.3 GW generation capacity, along with its distribution licence and franchise business.
Tata Power, Torrent Power and JSW Energy also have long-term PPA tie-ups for their generation capacities, ensuring stable returns that are fuelling their transition to renewables. But the brokerage firm believes that NTPC enjoys a relative advantage over its peers due to access to debt at a lower cost facilitating its renewables portfolio, likely modest revival in thermal capex on the back of high power demand, and immunity from the vagaries of coal price and availability.
NTPC is loved by analysts and currently boasts of 25 "buy" calls, one hold and zero sell calls. Its optimism score is 96.
Read more: Analyst Call Tracker | With all buy calls, Adani Ports tops the ‘Maximum Optimism’ list
Meanwhile, Sharekhan by BNP Paribas believes the outlook remains strong, given the expectation of sustained double-digit growth in power demand during summers. This bodes well for higher PLF for thermal power plants and would benefit NTPC.
“We highlight here that NTPC’s thermal PLF of 74.5 percent in the 9MFY23 was much higher than the national average of 63 percent and would further improve NTPC’s thermal PLF over Q4FY23- Q1FY24, given high power demand (peak demand estimate of 229 GW in April 2023),” it said.
With improved coal stocks at thermal power plants, Plant Availability Factor (PAF) has improved, and, thus, it expects fixed cost under-recoveries to decline for power companies. Moreover, the government’s power sector package of over Rs 3 lakh crore in the Budget would help power discoms clear dues of generation and transmission companies which would, in turn, reduce the power sector’s receivables and strengthen companies’ balance sheets, it said.