Power sector to power up Atma Nirbhar Bharat?
Atma Nirbhar Bharat and Vocal for Local are not just political slogans. They can translate into great investment opportunities too. If Indian companies identify weaknesses China has exposed itself to and make them their strengths, many of them will have exciting growth opportunities.
The country’s biggest external dependence isn’t electronics but oil. India imports nearly 80% of its consumption requirement. However, it has an abundant supply of renewable energy sources. The government has set an ambitious target of 175 GW to be achieved by 2022 and 450 GW by 2030—120% of India’s total installed power generation capacity at present.
But guess what, India imports 80% solar modules and solar cells—critical components in solar energy generation—from China. Another 15% come from countries such as Malaysia, South Korea, Vietnam and Taiwan to name a few.
Problems faced by India’s power sector aren’t new. State-centre disputes, over-running dues with state utilities, industry cross-subsidizing domestic and agriculture power consumption, transmission losses, coal linkages and financial distress of discoms have been chronic and noteworthy.
After a decade-long of stagnation, India’s energy sector is gradually looking up. Will it surprise everyone or will the newfound optimism wane sooner rather than later?
A few months ago, the Ministry of New and Renewable Energy (MNRE) has done away with caps on renewable energy tariffs. Crisil estimates tariffs to remains competitive at the current level of Rs 2.5 to 2.6 per unit—thanks to falling solar module costs and financial costs. Moreover, MNRE recently asked state governments to identify lands of 50 to 500 acres for putting up renewable energy manufacturing and export service hubs.
Electricity demand may go up steadily…
Some experts have been anticipating the present slump in electricity demand to stay longer. During lockdowns, the electricity demand decreased by 25%-30%. Treating a slack in the electricity demand during the lockdowns a new normal is unwarranted.
Despite being the world’s second most populous economy, India’s per capital energy consumption is 41% of the global average. In future, demand is expected grow as the Indian economy advances, India cuts its reliance on fossil fuels and household consumption rises with growing urbanization.
India’s recently launched campaign—One Sun One World One Grid (OSOWOG) which aims to create an ecosystem of regional and international interconnected grids of solar power is likely to gain popularity in future. This may help India become a prominent exporter of electricity.
Transmission to undergo a transformation…
The transmission sector is extremely critical for the development of the renewable energy sector. Transmission and distribution losses account for 22% at present. This leaves a lot of room for the improvement of existing networks, besides, an immense scope for establishing new transmission infrastructure.
The power transmission sector requires Rs 5 lakh crore in investments over the next few years to support various growth initiatives and make India a USD 5 trillion economy by 2025.
From the stage of project initiation, a coal-fired plant typically takes around 5-6 years to reach completion. This gives at least 3-4 years’ of time to construct transmission infrastructure required to evacuate and distribute the power once the generation capacity comes on stream. However, solar and wind power capacities can be built in just 12-18 months, which means, creation of transmission infrastructure must be meticulously planned and completed well-in time.
There is vast scope for the modernization of the existing network. To keep a buffer for contingencies—a critical factor in ensuring smooth interstate transmission—deliberate redundancies need to be created in the critical energy delivery corridors.
Can renewable and conventional power generation co-exist?
The cost of thermal power offered by the largest state owned company is around Rs 3.2 to Rs 3.4 per unit, on an average vis-à-vis Rs 2.5 to Rs 2.6 per unit cost of renewable energy. Discoms have been relying more on renewable power nowadays. And instead of entering long term contracts with power generation companies, they prefer short term contracts. It remains to be seen if with better availability of coal and better utilization, thermal sectors see any revival in activities. That said, experts believe while the incremental capacities will come only in renewable, the growth in renewable won’t replace thermal power. Both sources can co-exist and complement each other.
Health of discoms is expected to improve
Distribution has been the weakest link in the entire power sector ecosystem in India. The government has launched various revival programs from time to time which haven’t achieved the expected response so far. As a result, now the government is planning an overhaul of the entire distribution mechanism. New Draft Electricity Bill, 2020 encourages private participation, proposes to set up an Electricity Contract Enforcement Authority to resolve payment related issues and rationalize cross-subsidy on industry, among others.
In short, after experiencing years of stagnation, all three critical sub-sectors of the power sector—power generation, transmission and distribution may take a giant leap forward if they manage to get their act together.
As India may prefer to cut its reliance on Chinese imports, new growth avenues for the Indian manufacturers may open-up. It is equally crucial to see how equipment manufacturers and other related players respond to attractive growth opportunities.
Although made in his personal capacity, remarks of Sunil Misra, Director General, Indian Electrical and Electronics Manufacturers’ Association narrate the sentiment. All Power Generation Transmission Distribution Equipments and Services from China should be 100 % tested by CPRI(Central Power Research Institute) as China supplies cheap substandard equipment and may install malware/spyware. We can’t risk National Electricity Supply to Cyber threat from a hostile aggressive China. Protect National critical assets from hostile China.
Is a new bull market starting in the power sector?
The power sector has been demonstrating a number of signs of a fresh bull market— the sector has a demand visibility, it enjoys policy tailwinds, it has demonstrated strong execution capabilities in the past, valuations are cheap and the investors’ sentiment is still weak.
Which companies you should look for?
We screened 43 power sector companies and eliminated 19 of them due to their fragile financial condition and poor credit rating. Although the industry has been hard-pressing for one-time restructuring of loans, a few of them might not revive even if a loan-restructuring scheme is launched. The remaining companies can potentially benefit from the resurgence in India’s power sector. When a sector is turning around, it seldom looks perfect.
Various stock selection parameters might appear out of order at the initial phase of a turnaround and that’s where you must juxtapose valuation and growth opportunities. For example, low PE (or EV/EBITDA) ratio not only means the company is cheaply available but it also suggests that the market isn’t expecting any rapid growth from it either.
No surprise then, some solid state-owned enterprises trade at throwaway valuations and many of them have an attractive dividend yield. MNCs have historically enjoyed premium valuations. You may also stretch the theme and screen dedicated power financing companies as well.
Simply put, you have to take into account valuation, credit rating and return ratios and invest in companies that may be the potential beneficiaries of future growth in the sector. Needless to say, you will have to apply more stringent parameters to further shortlist the stocks. Price trends often tell you how the markets are treating the revivals and turnaround stories.
Markets are never wrong – opinions often are—Jesse Livermore
Please Note (read as a disclaimer): None of the stocks discussed in the article is the recommendation to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.
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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.