NTPC, Tata Power: Power sector stocks rally makes analysts cautious

The sharp rally in power sector stocks over the past few weeks has made analysts cautious on this space, who suggest fresh investment in these counters be made from a two-three year horizon. In the past one month, the S&P BSE Power Index has gained over 6 per cent, outperforming the S&P BSE Sensex that has moved up around 1 per cent. Tata Power, NTPC, Indian Energy Exchange and Power Grid Corporation of India have moved up 9 per cent to 22 per cent during this period, ACE Equity data show.

“One cannot paint the entire sector with the same brush. Though the run up does warrant some caution, valuations of most power sector stocks have been attractive since years, but it is only now that these stocks have started rallying. Moreover, stocks such as Tata Power (foray into solar energy) and NTPC (listing of subsidiaries) are news-driven. This is not the time to make a fresh investment in these stocks, but those who own can hold on for now,” said A K Prabhakar, head of research at IDBI Capital.

Last week, Tata Power hit a 13-year high of Rs 165 (previous high: Rs 158 on January 4, 2008) on reports that the company is looking at new business growth through rooftop solar and micro grids, electric vehicle (EV) charging infrastructure, home automation and smart meters. 

Taking stock
 

Even as India's demand for power is rising steadily, physical coal stocks, meanwhile, have hit dangerously low levels, and alarm bells are going off in the country's power sector, according to S&P Global Platts. India's average power demand increased 23 gigawatt (GW) on year to 186 GW between August 1 and August 23. It expects the average power demand from October to December 2021 to be at 167 GW, with coal-powered generation at 126 GW — about 12 GW higher year-on-year.

“India's total coal stock stood at 37.41 million mt at the start of 2021, according to the country's Central Electricity Authority. This has dropped to 8.317million mt as of Sept. 27—sufficient only for five days of coal burn. The FOB price of 4,200 kcal/kg GAR coal from Indonesia rose 125.34% from $44.4/mt on January 1 to touch a record-high of $100.05/mt on September 29,” Platts said.

That said, at the operational level analysts caution that though the coal shortage and the rise in prices is a short-term phenomenon, the rally in power sector stocks at the bourses now warrants some caution. Earnings of electric utilities such as NTPC and Power Grid, according to analysts at Kotak Institutional Equities, are regulated and linked to their equity base, while earnings of downstream oil companies may be at risk if they are unable to raise retail prices of automobile fuels to pass on the increase in crude oil prices.

“The recent sharp rally in prices of certain energy-related PSU stocks defies fundamental logic. The usual casual narratives of catchup trade, liquidity, rotation are irrelevant when viewed in a more fundamental context. We doubt much has changed for even the oil, gas and consumable fuels companies (Coal India, ONGC) that benefit from higher energy prices in the short-term. They still face existential threat from renewable energy, unless they are able to reorient their business models,” wrote Sanjeev Prasad, co-head, Kotak Institutional Equities in a recent coauthored note.

Powering ahead