Here’s why Harshvardhan Dole is bullish on the power sector

“We like NTPC, Power Grid and essentially NHPC which are scaling up capacities to meet this rising power demand in India,” says Harshvardhan Dole, IIFL Securities.

Your take as far as the government measures is concerned and what does this tell you with respect to the outlook for power sector?
The power demand has continued to surprise us. Frankly, double-digit growth on a very high base that is quite a surprise and interestingly no IPP has complained about significant payment delays so that means there is something right which is happening. And on that backdrop, if the government has taken measures such as invoking section 11 or asking utilities to import coal so that the peak demand can be met and there is no shortage of power, at the margin it is certainly a positive step and it only goes on to say that over the years essentially the system planning has certainly improved and it will ensure that there are no mass power cuts at the time when the economy is bottoming out. So to me it is certainly a positive step.
Good to hear that at least the planning has improved and that will mean that during the peak summers we will not have the power cut at a time when as you pointed out the manufacturing and industrial sector is actually looking quite robust. But which other companies you think are best placed to perhaps make the most on the upside?
Frankly, after the decadal long consolidation, strictly the large merchant power revenue models do not continue to exist as of now. There are companies with bits and pieces some exposure to the merchant capacity but that is not that meaningful and therefore as a conservative house we tend to like the utilities with cost plus revenue model which are growing capacities and earning that cost plus assured ROE spread.

And in that context, we like NTPC, Power Grid and essentially NHPC which are scaling up capacities to meet this rising power demand in India. On that backdrop, we also like Torrent Power. We are hoping that some reforms will kind of play out and these companies will actually benefit from these reforms. So we are quite positive on the sector per se.

What makes you that bullish on the counter? Is it that new parallel distribution license that they are bidding for?
Over the years that is one company which has grown the earnings through combination of renewables as well as distribution and that is what the incremental capital allocation strategy tends to be. We are quite upbeat on both of these segments, distribution because as the power demand grows and the reforms kick in private players will actively play a role in shaping up the sector and Torrent is one of the few players who have got the DNA to scale up the distribution business. So that is number one. Number two, even while scaling up the renewable portfolio they have exhibited that they are not reckless in terms of bidding and they are selectively taking over assets or selectively growing the portfolio with returns being the critical factor to monitor. And then if you have a strong balance sheet, prudence in terms of capital allocation you cannot remain ignorant to such kind of growth story. Moreover, the earnings growth will be in high single digits or low double digits and the valuations are quite undemanding on FY24-25.

Now the government is forcing these companies to import more coal if needed but what happens to the cost for all of this, is this going to be a complete pass through is that mechanism in place or will the companies face working capital issues?
It is a very valid critical question. So while power demand has grown and partly the states have been able to pay for the power thus far partly because of their collection efficiencies perhaps going up and perhaps also because of the incremental working capital. I am being mindful of one fact that there are seven state elections lined up in this particular financial year and typically states have not shown strong political will during the election times to increase the power tariffs. What can derail the whole story is basically if the demand keeps on growing recklessly and states do not undertake required power tariff hikes then perhaps we will have to revisit the whole bullish argument.

I am hoping on the fact that commodities eventually will correct, the coal prices will moderate and even though the demand will keep on increasing the lower cost pressures will ensure that even on the existing tariffs states continue to service their PPA obligations. But yes, if the commodities remain at an elevated level then we will have to revisit the whole hypothesis.