Utilities: Who will meet my demand?

23 Nov 2023 , 10:40 AM

Stakeholders across the Power sector see continued stable demand growth, but remain concerned on the ability to meet demand, weak SEB financials, etc. MoP’s call to add coal (80GW) and RE (390GW) by FY32 is seen positively, for which stability in regulations is envisaged. Meanwhile, analysts of IIFL Capital Services forecast companies to report -2 to 10% p.a. earnings growth through FY26 with upside risks for TPWR and TPW. Analysts of IIFL Capital Services remain selective and maintain a positive stance on NTPC, TPW, and CESC. 

Demand is good, but supply may lag: 

Power demand is up 7% YoY in H1FY24 and should remain firm over the next 2-3 years. Stakeholders are concerned about weak SEB financials (no tariff hike), systemic ability to meet peak demand, and the preparedness to meet demand >FY25. Meanwhile, stop-gap arrangements to avoid energy crisis (S/11, kickstarting gas-based IPPs, etc.) are appreciated. The industry is expecting stability on regulations (G/T/D) to encourage fresh investments in thermal generation, even as MoP calls for 80GW coal-based capacity adds. Such a call improves growth visibility for incumbent utilities like NTPC, PWGR, TPW, CESC, etc., which have strong balance sheets. 

Moderate earnings growth until FY26: 

Assuming stability in regulations, capacity adds and steady demand growth, analysts of IIFL Capital Services forecast sectoral earnings to register -2 to 10% p.a. earnings growth through FY26. TPWR and TPW can see meaningful upside to their earnings growth, if S/11 continues and gas-based IPPs are turned around respectively. NHPC has seen consistent delays in capacity adds for which analysts of IIFL Capital Services see risk to the earnings. CESC may see a marked improvement in cashflows if WBERC raises tariffs in FY25/FY26. 

Stocks pricing in 1-51% FCF growth: 

Valuations of utility companies are well above distress after their recent OPF, for which one needs to take a slightly longer-term view and evaluate the risk-reward. Analysts of IIFL Capital Services try and see the growth in FCF that the stocks are pricing in through FY27-35. On this framework, the valuations of NTPC, PWGR, CESC, and TPW are still reasonable (1-8% p.a. implied growth) whereas TPWR and NHPC seem to be pricing in 16%/51% growth respectively — which looks a bit stretched. Analysts of IIFL Capital Services remain selective and positive on NTPC, TPW, and CESC. Selectively, one can also evaluate the vendor base, which can meaningfully benefit if the visibility on the capex cycle improves.