Rebound in power demand to fire up related stks over medium-term: Analysts

Power stocks are back in focus as demand crossed the 200-gigawatt (GW) mark last week, amid the onset of the harsh winter season. This matched the peak demand of 216GW recorded during summer months. Analysts expect the S&P BSE Power index to build on the double-digit gains, which it logged during calendar year 2022 (CY22), as the outlook for the sector remains robust.

 

"We expect power demand to remain between mid-to-high single digits for the medium-term, given favorable government policies like 'Power for All' and stable financials of state discoms (distribution companies). While we expect improving load factors to benefit regulated companies in the near-term, the recovery in capacities would help them sustain their performance in the long run," said Ekta Mehta, Portfolio Manager at Karma Capital.

 

Power generation in the country rebounded from flattish levels in October, 2022, to double-digits in Nov-Dec'22, leading to 8 per cent year-on-year (YoY) growth in Q3FY23. While the generation from thermal units rose 7.3 per cent YoY during the quarter, renewable energy generation jumped 25 per cent YoY. Overall, the power generation grew 10 per cent in the first nine months of 2022-23.

 

Further, for the fourth quarter of this fiscal year (Q4FY23), power demand is expected to grow in the range of 6-7 per cent YoY on the back of an intense cold wave, and a pick-up in economic activity. It has already soared 14 per cent YoY in the first eight days of CY23, as per a Crisil market intelligence and analytics report.

 

Abhijeet Bora, deputy vice president for research at Sharekhan by BNP Paribas, believes that the higher power demand bodes well for companies like Tata Power, CESC, and Indian Energy Exchange (IEX). The strong commercialization plans of NTPC and Tata Power's transition to renewable energy will be key triggers to watch out, he added.  

 

That apart, analysts expect the softened coal prices in the international markets to bode well for power stocks as power deficit normalized to 0.4 per cent in Q3FY23. Prices of coal have dropped 16 per cent to $370 per tonne, from record highs hit in June 2022, owing to hopes of weaker demand amid global slowdown.

 

Mehta of Karma Capital foresees that the domestic coal prices will follow the trend set by international spot prices of coal, which would aid power volumes in exchanges.

 

Despite an 11.9 per cent increase in domestic coal supplies to utilities, coal imports by Indian utilities more-than-doubled to 42 million tonnes during the first eight months of FY23. Given this, the power ministry has directed all generation companies to use imported coal up to 6 per cent of their requirement, anticipating a coal shortfall of 24 metric tonne at thermal power plants for the first six months of FY23-24.

 

Analysts at HDFC Securities expect the power industry to report 28.5 per cent YoY earnings growth in Q3FY23, owing to the strong generation growth and improved coal availability. "We remain positive on regulated entities like NTPC, CESC and NHPC, trading at comfortable valuations, and which are expected to see better earnings due to improved demand and availability. Tata Power could also report an exceptional gain from the CERC's relief order," they added.

 

On the bourses, shares of Adani Power, Adani Transmission, CG Power, NHPC, NTPC, and Adani Green Energy have surged up to 61 per cent so far in FY23, ACE Equity data shows. Tata Power and JSW Energy, meanwhile, have delivered negative returns. In comparison, the S&P BSE Power and S&P BSE Sensex indices have climbed 8.3 per cent and 3.8 per cent, respectively, during the same period.