POWERful rally to continue: 4 power stocks with up to 31.3% upside potential The returns are calculated between 29 December 2023 and 25 October 2024 closing values. Despite the remarkable rally, there is scope for further upside during the festive season and winter months. Recent reports from Nomura, Motilal Oswal, JM Financial and IBEF are positive on the growth prospects of the sector. Read on to find out where to invest
Power sector stocks have witnessed a strong rally in 2024, with the BSE Power Index significantly outperforming the market benchmarks. It registered 35.8% year-to-day returns compared to BSE Sensex and BSE 500 indices with 10.8% and 16.9% returns. Moreover, all 13 stocks of the BSE Power index delivered positive returns with 11 stocks outperforming the BSE 500 index. The returns are calculated between 29 December 2023 and 25 October 2024 closing values.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} Despite the remarkable rally, there is scope for further upside during the festive season and winter months. Recent reports from Nomura, Motilal Oswal, JM Financial and IBEF are positive on the growth prospects of the sector.
The Nomura report states that apart from primary power demand drivers (residential, industrial, commercial sectors), the new demand is emerging from the rising trends of electrification, upticks in data centre capacities, rising EV adoption and green hydrogen. The report anticipates India’s energy demand to register a 7% CAGR over 2023-24 and 2029-30, which remains higher than its historical demand CAGR of around 5%.
The Motilal Oswal report estimates an investment opportunity of Rs 40 lakh crore in the Indian power sector over the next decade, with generation, transmission and smart metering accounting for 86%, 10% and 4%, respectively, of this spending. It lists electrification of energy in residential, office buildings and transportation segments, 5G, artificial intelligence, rising GDP and regulatory support as key tailwinds. The IBEF report lists factors like greater industrial activity, growing population, increasing electrification and per capita usage, demand-supply mismatch (annual demand outstrips supply by about 7.5%) and policy support (relaxed FDI norms and schemes like DDUGJY, UDAY and IPDS) as key catalysts for the power sector.
A quarterly preview report from Elara Capital expects steady earnings for its coverage universe of power companies despite lower demand during the quarter. Apart from power utilities, brokerages are also bullish on the power sector financiers (Power Finance Corporation, REC). “The ability of PFC and REC, as stateowned NBFCs, to mobilise and manage substantial amounts of capital renders them indispensable to India’s energy ambitions,” states a separate report on power financiers by Motilal Oswal. Other reports from UBS (last week of August 2024) and Bernstein (first week of July 2024) list lower risk of NPAs due to diversification of loan book towards renewables and infrastructure financing, and improvement in operating metrics of discoms as key growth drivers.
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We analysed three power utilities stocks, and one power financier based on the recommendations of recent brokerage reports. Tata Power and JSW Energy got a buy rating from Nomura, Motilal Oswal and JM Financial, whereas Power Grid is favoured by Motilal Oswal, JM Financial and Elara Securities. Among power financiers, brokerages prefer both Power Finance and REC. Only REC is included in the article (for Power Finance, refer to ET Wealth’s 21 October 2024 edition).
Tata Power
ITS PRESENCE across thermal and renewable power generation, T&D and solar module manufacturing provides it an advantage over its peers. It is exploring opportunities in transmission, EV charging and pumped hydro projects, and enjoys a dominant market share in solar rooftops. The management aims to double its EBITDA and PAT by 2026-27, with significant contributions from renewables and T&D segments. Recent project wins in T&D and a growing renewable energy (RE) utility pipeline are expected to support the guidance. It will deploy 45% of Rs.60,000 crore capex over 2023-24 and 2026-27 for RE-related projects. The Motilal Oswal report lists improved balance sheet strength, lower commodity exposure, integrated business model, strong execution track record and potential of leveraging synergies with the Tata group as key strongholds.
JSW Energy
THE INDEPENDENT POWER producer is benefitting from a strategic shift to renewables and continues its large-scale participation in the RE tendering auctions. The company’s expertise in the renewable space allows it to deploy assets at a faster pace, which improves cash flow visibility. Also, around 92% of its installed capacity is tied up under long-term power purchase agreements (PPA) that provide better earnings visibility.
The Nomura report sees a robust outlook for JSW Energy with 38% EBITDA CAGR over the next three years. It lists large wins in upcoming RE tenders, lucrative tariffs delivering decent IRRs, strong cashflow generation, scope for improving cost structures through strategic partnerships and further potential upsides from incremental capacities (for JSW group’s green energy transition and green hydrogen) as key positives.
Note:Current price as on 22 Oct 2024. *Target prices are averaged for brokeragesmentioned in story. Source: Reuters-Refinitiv, brokerage reports
Power Grid Corporation
IT IS A BENEFICIARY of the opportunities in intra-state and cross-border transmission projects and a pick-up in the capex cycle. The capex is expected to jump from Rs.11,400 crore in 2023-24 to Rs.22,000 crore in 2026-27. Transmission infrastructure for non-fossil fuel-based energy sources, green hydrogen and network for battery and pumped storage systems are key transmission capex drivers.
The company has a strong order pipeline with Rs.1,14,100 crore of work (at the end of June quarter). Of this, around 41% includes RTM (regulated tariff mechanism) projects, which earn 15% RoE. Moreover, the upcoming HVDC (high voltage direct current) projects provide attractive growth opportunities. It remains best placed to win and execute such projects compared to private sector players.
REC
THE COMPANY is increasing its financing towards renewables and infrastructure projects. The contribution of renewables in loan mix jumped from 8% in 2022-23 to around 38% in 2023-24. Going forward, the loan growth is likely to remain robust. In addition, REC will benefit from the reform-based, result-linked power distribution sector scheme launched by the government that has improved the health of the distribution utilities.
The modernisation of traditional thermal power plants and installation of FGD (flue gas desulfurisation) systems in the existing and upcoming thermal power plants will also create lending opportunities for REC. The Motilal Oswal power financiers report expects REC to register a loan CAGR of 18% over 2023-24 and 2026-27. Its RoE is estimated at 21% each year from 2024-25 to 2026-27.
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This story originally appeared on: India Times - Author:Faqs of Insurances
