Utilities: Don’t miss the forest for bushes

23 Jan 2024 , 11:48 AM

The Indian Power sector has entered a multi-year capex cycle across G/T/D. Demand growth is real, while supply is elusive, warranting frantic measures from the policymakers. MoP’s call to add thermal capacity and CERC’s accommodative draft regulations reflect the dire situation; players with a strong balance sheet, execution capability, and sustainable revenue model will reap the near decade long benefits. Analysts of IIFL Capital Services reiterate their positive stance on the sector; upgrade Tata Power, and see NTPC, Torrent Power best placed in periods of strong tailwinds. 

Running out of capacity: 

India’s power demand growth is real and frantic measures are necessary to ensure energy security; call by power ministry to add 80GW/500GW thermal/RE capacity and accommodative stance by CERC in its draft tariff regulations are good reflections. Analysts of IIFL Capital Services see a decade long capex cycle, offering investment opportunities for players across segments including the vendor base, fuel suppliers, financers, etc. Firm political will, particularly by the states, can pave the way for the much-awaited reforms in the Distribution segment. During this period, players with strong balance sheets and execution capabilities stand out. 

Favourable macro:

Players surviving the decade long consolidation have only emerged strong, and have a multi-year runway ahead; meanwhile, companies adding capacities in the interim no longer have to struggle to sell it. Similarly, IPPs with unfavourable economics have a strong case to correct it sustainably for which, analysts of IIFL Capital Services maintain NTPC/NHPC/PWGR 10/10/6% p.a. PAT growth through FY26 and up PAT forecast for Torrent Power and Tata Power by 4-5%/32-45% respectively (turnaround in problematic IPPs). Meanwhile, Suzlon, Inox Wind, other vendors may see exponential growth in their respective order books as new project award accelerates; but need to overcome their patchy past. 

Focus on champions:

Utility stocks seem to price in earnings growth until FY25/26, at a time when growth visibility extends for the next decade and the pool of investible stocks has shrunk considerably. Analysts of IIFL Capital Services like NTPC, and Torrent Power the most, as revenue models are sustainable, scalable, backed by impeccable track record. Tata Power also stands out with its diversification strategy (upgrade to ADD). Analysts of IIFL Capital Services like others (CESC, NHPC, PWGR etc) as well, but await a better entry point.