Investors harness Northern India's sizzle for power stock pursuit

Jolt of optimism: Analysts predict endurance in power stock rally, advocate long-term hold

Two months into summer, India’s power demand has reached its highest level for the season. On May 18, the country’s peak power demand reached nearly 230 gigawatt (Gw), surpassing the previous peak of 223 Gw recorded on May 6.

On the bourses, investors have also been chasing power stocks amid a seething heatwave sweeping across Northern India.

For instance, Tata Power’s stock and NTPC’s stock hit fresh record highs of Rs 464.3 and Rs 380.4 per share, respectively, on May 3.

Likewise, Power Grid Corporation of India’s (PowerGrid’s) stock price hit a new record high of Rs 328.35 on May 22, while JSW Energy’s stock price reached its lifetime high of Rs 651.5 on April 22.

So far in the calendar year 2024, power stocks have outperformed the benchmark S&P BSE Sensex by surging between 18 per cent and 52 per cent, compared to a 4.4 per cent rise in the 30-stock index, according to ACE Equity data.

Yet, analysts see more potential in this rally as the sector is poised for robust growth amid rising household and industrial power demand.

According to Parth Shah, a research analyst at StoxBox, there are structural drivers in place for the sector, apart from the ongoing heatwave, which should keep the power sector buoyant going forward.

“The robust industrial consumption, along with the growing adoption of electric vehicles in India, is fuelling demand. Companies across the value chain are poised to benefit from the government’s initiatives. With valuations still attractive, we feel there is room for growth for power stocks from a medium- to long-term perspective,” he says. Shah favours NTPC and PowerGrid.

Demand surge

India’s peak power demand has reached 229.6 Gw this summer.

Among states, Delhi’s peak power demand peaked at 8,000 megawatt (Mw) on May 22, the highest ever in the history of the national capital.

Similarly, Punjab recorded its highest-ever power demand for the month of May, with demand crossing 14,000 Mw.

The Ministry of Power anticipates peak power demand to touch 260 Gw during the April–June summer season due to the prolonged heatwave.

Coal stock in the country stood at 147 million tonne (mt) as of May 15, reveals government data. This is about 25 per cent more than the coal inventory of 117 mt seen on the corresponding day of the previous year.

Investing in power stocks seems a favourable strategy at this point in time.

“The ongoing high demand for electricity, coupled with the government’s efforts to stabilise and enhance power generation, provides a positive outlook for power companies,” says Anirudh Garg, partner and fund manager at Invasset.

Thermal power plants, particularly those utilising coal, are operating at high capacity. This, he adds, will help these companies post strong financial earnings in the near term.

Valuation check

On the valuation front, the 12-month forward price-to-earnings (P/E) of most power companies is higher than their five-/10-year average.

The current P/E of NTPC, for instance, is 17x versus its five-year average of 9x. Likewise, the P/E of JSW Energy is 36x versus a five-year average of 25x, according to Bloomberg data.

Analysts nonetheless believe the stock prices of power companies do not fully price in the impact of sustained high demand and ongoing government policies. They thus suggest investors hold power sector stocks as demand is expected to reach a peak of 335 Gw by 2029.

“The government’s ambitious plans to improve power infrastructure and increase the share of renewables in the energy mix provide a solid foundation for continued growth. Power stocks are set to register long-term gains,” says Garg.

Pravesh Gour, senior technical analyst at Swastika Investmart, further adds that the renewable energy sector is expanding at a healthy rate, and companies positioned to benefit from this long-term trend might have further room for growth. He prefers Tata Power, Adani Power, NTPC, and JSW Energy.