India Utilities: Demand ON, Supply Gone….??

10 Mar 2023 , 10:30 AM

There has been underinvestment in the thermal capacity (23GW only in pipeline versus 225GW expected peak demand). The scramble for Power should prompt investments in new thermal IPPs and RE, which bodes well for players across the chain. Analysts at IIFL Capital Services like NTPC and TPW the most and see NHPC, PWGR, CIL, etc., as good yield plays.

Desperate measures in critical times

Power demand YTD is up 11% YoY and should grow at least at 7-8% p.a., on the back of economic recovery and the focus to offer 24×7 power to all consumers. However, the supply may be an issue as there is only 23GW thermal capacity under construction (peak demand is 225GW). This is because policymakers have focused more on green power (now 29% of total capacity). It seems that in order to avoid power outages in a run up to key state and national elections, policymakers have imposed Section 11, which mandates coal blending for all, as well as kick-starting the stranded gas-based IPPs. Instead of these ad-hoc measures, the lasting solution is to fast-track RE and coal-based capacity additions for LT energy security.

Who gains the most?

Pickup in power demand has differentiated the impact on stakeholders across the value chain. Stranded IPPs (eg: TPW’s Dgen, etc.) could gain the most with partial / complete restart of operations, followed by distribution companies (DF > DL). Regulated ROE models will gain the least, given TOP contracts. Coal India (CIL) should comfortably be able to sell in undersupplied market, if the company sustains production ramp-up. The disputed PPAs (eg: UMPP etc.) — if sorted out — can also lead to material gains for select IPPs.

NTPC, TPW– top picks

Analysts at IIFL Capital Services have maintained a positive view on the sector, on the back of cyclical demand uptick and policy support. They like NTPC the most (13% PAT CAGR through FY23-25) with reasonable valuations (8.7x FY24ii P/E), followed by Torrent Power (Distribution-led growth + governance). CESC (0.7x FY24 BV) could materially re-rate, if WBERC offers tariff hike given the strong demand outlook. TPWR’s re-rating hinges on firm coal and pass-through at UMPP, while CIL is good yield play. For NHPC and PWGR, analysts at IIFL Capital Services await a better entry price point.