Power sector stocks have been shining bright in the last few months. Stocks such as ABB India, NTPC, Adani Transmission, NHPC and Torrent Power are near their 52-week high levels.
The BSE Power index hit its all-time high of 5249.56 on August 30, 2022. In the last one month, the power index has gained as much as 12% while the benchmark Sensex has risen by a percent.
What has changed for power companies?
The sector appears to be in a sweet spot thanks to rising demand as economic growth picks pace. The sector is going through a gradual fundamental change. As industry experts point out, the sector is witnessing a sort of transformation.
The power companies are now looking into renewable energy and they are keen on adding incremental capacity in this space. They are now diverting their focus from setting up fossil fuel plants to renewable energy.
While there is no such immediate trigger for the surge in power stocks, global brokerage firm Jefferies sees five key triggers that will play out for the power sector in the next few years.
"We believe five triggers will play out for the power sector in the next five-eight years: (1) Renewable energy (RE) capacity rising 82% by FY26-27 and 2.8 times by FY30; (2) thermal capex revival; (3)transmission capex CAGR of more than 15% versus less than 5% in the last five years; (4) policy, especially distribution being a game changer; and (5) green hydrogen ramp-up," said Jefferies.
Arijit Malakar- Head of Research - Retail, Ashika Group pointed out that the power demand is expected to rise in the next five years on the back of rising industrialization, residential and manufacturing-linked demand, and data centres.
The government is also taking steps which are expected to augur well for the power sector. Since 2021, the government has introduced a lot of reforms for transforming the power sector.
As Malakar underscored, the government of India last year announced a 500 GW non-fossil fuel target including 450 GW RE by 2030. Cabinet has also approved the ₹12000 crore green corridor transmission project in January 2022 which will facilitate grid integration and power evacuation of approximately 20 GW of RE power projects.
Deepak Jasani, Head of Retail Research, HDFC Securities, highlighted that the government is trying to fulfil its aim of providing quality, reliable and affordable energy access in a sustainable manner. It has also taken initiatives and encouraged investments to accelerate the clean energy transition as India targets to have 500 GW of RE capacity by 2030.
These all initiatives from the government's end would augur well for the power sector.
But the sector has some concerns too
The sector is facing challenges in terms of the availability of coal.
"Utility companies which depend on imported coal witnessed higher import bills on the account of a steep rise in international coal prices and freight charges. At the same time, the power companies are not been able to fully pass on their higher cost prices which resulted in weak margins and return on equity (RoE)," said Malakar.
"In the power space, companies like NTPC and Tata Power have a well-balanced portfolio of both renewable energy and fossil fuel plants and thus could capitalize on the growing opportunities going ahead," Malakar said.
The poor financial health of power distribution companies (discoms) is another concern. As per reports, they have cumulative outstanding dues of more than ₹1.5 lakh crore which they have to pay to power distribution companies.
Transmission and distribution (T&D) losses and subsidized or free power are the key reasons behind the poor finance of discoms.
Jasani believes the privatisation of discoms and incentivizing private investment in the sector are steps in the right direction but have been met with resistance by the politicians and labour unions.
"While reforms have been taken to address the challenges, implementation of these reforms will be a key monitorable. Private generation companies face the issue of fuel availability and long-term PPAs with buyers of power," said Jasani.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.