Power stocks charged up on rising economic activity and demand

Despite hurdles faced by sector, Street appears bullish

Power consumption has a very strong link with economic activity and it’s showing very positive signs. This is seen in the stock market performance of utilities, and other power companies, which have jumped 13 per cent on the Nifty Energy index over the last month.

In August, power demand rose by 4 per cent over July and 18 per cent over August 2020 while peak demand touched 196 Gw. Thermal generation rose by 4 per cent month-on-month. This also meant that coal demand rose and coal prices too, though the rise in domestic prices is lower than in the international arena. Most experts see the trend continuing in September.

One concern for Indian generators is the permanently stressed finances of distribution companies (discoms). The dues from discoms aggregated to Rs 96,000 crore by August end. The Liquidity Relief Scheme, designed to help discoms meet their dues, had lower disbursements.

Power demand rose 16 per cent year-on-year in the April-August period off a low base, since April-August 2020 saw a contraction of 11 per cent. However, this means demand is up around 3 per cent YTD (year-to-date) over the pre-pandemic period of 2019-20.

Merchant power volumes at IEX have risen 70 per cent YoY despite a sharp spike in prices due to higher demand. If the Mundra thermal JV can move to merchant power, it’s estimated that merchant volumes could be even higher. The base effect will moderate in the October-March period but we can expect growth rates in power consumption to remain positive.

On the legislative side, the sector is still awaiting the passage of the Electricity Amendment Bill. This seeks to delicence power distribution and reduce entry barriers for private players. While the delay is disappointing, there is a gradual privatisation of distribution circles.

There is plenty of opposition to the bill, however, and could lead to a situation where state-owned discoms lose profitable customers.

The trend towards renewables is, however, clear. India’s generation major, NTPC, is scaling back on thermal capex. After FY25, it will probably not add meaningful thermal capacity. Others like Tata Power, Adani Green, are also looking at renewables.

The sector has problems. However, an increase in economic activity should still translate to better top and bottom lines. NTPC, Tata Power, and Power Grid have double-digit returns in the last month, and most companies in this space have positive returns in the last 12 months.