Revival feeding demand to spark re-rating of power companies

To be sure, a palpable coal shortage that’s spawning headlines nationally will likely have no impact on the private players as they import most of their coal from captive mines abroad.

The BSE Power index rose 2.63% on Monday to close at a 23-year high. Borosil Renewables, Inox Wind, Indian Energy Exchange (IEX), Sterling and Wilson, Tata Power, Torrent Power, among others, rallied between 7% and 15%.

Sharp likely recovery in demand, primarily from industrial and commercial segments, lifted sentiment on power stocks, said analysts. Their top picks are Tata Power, IEX, Coal India, NTPC, Power Grid Corporation and JSW Energy.

“The ongoing rally in power stocks is a reflection of the revival in the economic activity, capex on renewable energy and power sector reforms,” said Vinod Nair, head of research, Geojit Financial Services. “The major beneficiaries are the companies, which are focusing on renewable energy. We are positive on Tata Power, Power Grid and NTPC.”

Analysts expect 12-14% power demand growth in FY22 on the back of sustained improvement in economic activity.

“The valuations of the stocks are relatively attractive while the renewable energy space is getting a lot of attention from the foreign investors,” said Gaurav Dua, head of capital market strategy, Sharekhan. “Private firms are not impacted by the coal shortage or increase in coal prices.”

Power demand has increased 11% and 18% in July and August, respectively. The demand has also led to a shortfall in the coal supply. Generally, coal supply is weak in the September quarter, given seasonal rainfalls.

And this time, it is aggravated by supply constraints which are expected to be corrected in the coming quarter.

“The power sector is on the cusp of a major transformation with various new policies and reforms such as consumer rights for 24×7 electricity, the new tariff policy and revamped distribution sector scheme,” said Swarnim Maheshwari, analyst, Edelweiss Securities. “For stocks, we continue to be selective with a bottom-up approach and hence prefer Tata Power, CESC and NTPC.”