Brokerage firm Emkay Global Financial Services has a positive view of the power sector as the brokerage firm believes low growth in the first two months of Q2FY23 is transitory and the sector will see normal growth after the rainy season.
The brokerage firm highlighted that the power generation witnessed just about 1.5% year-on-year (YoY) growth in the first two months of Q2FY23, as against 16% during Q1FY23, which had the impact of the low base due to Covid-19.
August generation has been less than 1%. On a 3-year CAGR basis, growth for the two months has been 3.5-5%. Hydro growth has been strong at 10%, while Thermal and RE growth stood flat to moderate at 2%, said the brokerage firm.
"A closer look into the electricity demand pattern suggests that heavy rains during July-August 2022 (up 30% YoY) might be the main reason for the same. Both residential and agricultural demand has a high correlation to weather conditions. As the rainy season recedes, we believe growth in power demand will normalize to the medium-term figure of about 5%," said Emkay.
"A good part is that while overall coal dispatch has been nearly 7% for these two months, the power sector has received about 14% higher coal in August 2023 as against August 2022–YTD numbers stand at 20%. This is good compared to last year when India faced a good demand upsurge during Sep-Oct and many thermal units did not have enough inventory," said Emkay.
The brokerage firm has a 'buy' call on the following 4 stocks from the power sector. Take a look:
In July-August 2022 period, the generation for NTPC (Standalone) grew by 9.2%, which is great considering all Indian thermal generation stood flat, said the brokerage firm.
"Generation from key subsidiaries/JVs of NTPC grew by 28%. NTPC is expected to monetize its RE assets in the near future and continues to target 60+GW RE assets by 2032. Incremental thermal assets (5GW planned) will add to
steady earnings growth. The stock price of NTPC has increased by over 50% in the last one year, but it still trades at about 1 time PB on FY25E with nearly 12% RoE and 6-7% earnings CAGR," said the brokerage firm," said Emkay.
While transmission intensity might have come down in the last few years, the medium-term outlook clearly indicates 5/6% growth in Power Grid’s earnings, said the brokerage.
At the current market price, the dividend yield stands at nearly 6%. Intra-state transmission opportunities and smart
metering-related investments remain key monitorable apart from inter-state opportunities, said Emkay.
Medium-term tie-up for the about 200MW with Railways from Chandrapura plant has started from Q1FY23 and will result in FY23 PAT of ₹2-2.5 billion against ₹1.2 billion in FY2022, said Emkay.
While for the past two years, power demand in the Kota circle has been weak, as this circle has a number of coach centres, which went online.
Moreover, there is a general improvement in demand. In FY22, this circle reported a loss of nearly ₹500 million. This can come down over the next 12 months, said Emkay.
Base Kolkata business continues with a ₹8-8.5 billion profit business. While there hasn’t been any tariff increase, capex has been approved by the regulator, the brokerage said.
Presently, the dividend stands at ₹4.5-5/share, implying a 5.5% dividend yield. FY2025 book stands at ₹98 with 13% RoE. All utilities are trading at around book or higher; hence, CESC should re-rate, said Emkay.
NHPC is expected to commission 2,800 MW of hydro capacity (50% of its present capacity of 5.5GW) over the next two years, Emkay said.
As per the brokerage firm, Parbati II (800MW) and Subansiri (2,000MW) are at advanced stages of construction. Together, they will add ₹90 billion to the regulated equity (up from ₹130 billion to ₹220 billion) over the next 2-3 years.
Apart from 2800MW under construction at the standalone level, NHPC has nearly 3.6GW of projects under construction through subsidiaries/JVs.
On the RE side, 1,040MW of solar projects are under construction and 600MW is under a tender stage at the standalone level. This will lead to an improvement in RoE from 9.5% to about 11% by FY2025. Emkay expects an EPS CAGR of nearly 11% over FY22-FY25E.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.
