Utilities: Optimism but not without concerns

1 Mar 2024 , 11:10 AM

The MoP’s call to fast-track RE/thermal cap adds is taken well by the industry, which is bracing for a capex uptick. However, the optimism is not without execution concerns (land acquisition, financial closure, equipment supplies, policy flip-flop, etc.). Nearterm earnings outlook is steady, as growth visibility improves >FY26. Analysts of IIFL Capital Services like NTPC and Torrent the most, and would look to accumulate Powergrid, Tata Power, CESC, etc., on dips. 

Execution issues:

Power ministry’s call for fast-tracking the 500GW/88GW RE/coal capacity is taken well by the industry (demand>supply). However, players are mindful of the execution challenges, which are more severe for thermal and wind projects where the vendor base has seen financial hardship over the past 5-8 years. Further, for adding 40-45GW RE capacity, India needs to acquire 200- 220k acres of land p.a., mobilise Rs2-2.2trn debt, and arrange Rs750- 800bn equity; thermal requirements are much more; and to that extent, the challenges are real. While companies like NTPC will still be able to arrange finances, work with equipment suppliers, BOP vendors, etc., several others may not. Sustained policy flip-flop (eg: ALMM for solar modules, etc.) is also an issue; some clarity is expected soon. 

Stable earnings outlook: 

While earnings for the industry may accelerate >FY26, earnings until then will remain steady on the back of completion of projects already announced and stability in the regulatory framework. Analysts of IIFL Capital Services forecast Utilities to register 6-13% p.a. EPS growth through FY24-26. In the past three quarters, they have upgraded earnings for TPW and TPWR by 14-17%, on an improving outlook and regulatory support. NHPC’s earnings have risk from consistent delay in projects, while CESC may see a marked improvement in cashflows if WBERC raises tariffs post elections, or is able to fast-track RE ramp-up. 

Focus on forest, not bushes: 

Valuations across the sector are well above distress, and factor in FY25/26 earnings. That said, analysts of IIFL Capital Services like sector champions like NTPC and Torrent Power who offer a decade-long growth visibility. PWGR — the best proxy on RE and thermal cap adds without exposure to the underlying power prices — is perhaps 10-15% expensive on FY26; await a better entry point for it along with others.