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BSE Power index hits over 10-year high; analysts advise booking profit

The industrial and commercial power demand in the country grew at 12.6 per cent in the first week of June
Shares of power generation and distribution companies have rewarded investors handsomely over the past two months with returns of Reliance Infrastructure, JSW Energy, Adani Power, Power Grid Corporation, NTPC, Tata Power, and Torrent Power ranging between 8 per cent and over 90 per cent. In comparison, the frontline Sensex index has advanced around 6 per cent while the BSE Power Index added 17 per cent during the period, ACE Equity data show.

On Tuesday, the S&P BSE Power index hit a 10-year high of 3,008, a level last seen in January 2011, in intra-day trade. Among individual stocks, Adani Power hit a record high of Rs 151, soaring 19 per cent in intra-day trade on Tuesday, on the back of heavy volumes while Torrent Power and Tata Power gained over 4 per cent each on the BSE. In comparison, the benchmark S&P BSE Sensex was down 0.17 per cent.

In the past one week alone, the S&P BSE Power index has surged 6 per cent, against less than 1 per cent gain in the benchmark index after Ministry of Power (MoP) released a discussion paper on the implementation of Market-Based Economic Dispatch (MBED) which argues for redesigning of day- ahead scheduling of electricity markets in the country on a market based / integrated approach in order to realise the ‘One Nation, One Grid, One Frequency, One Price’ framework.

According to ICICI Securities, MBED will benefit both generation and distribution companies as it is a wider scoped SCED, which is already operational, and will result in more efficient utilisation of low cost generating capacity across the country, and thereby, reduce tariffs for discoms and consumers. 

Analysts, however, warn against chasing the “exuberance” rally and suggest booking profits as data for power consumption remains weak when compared with historical average. 

"Investors should wait for a good correction to enter the stocks as this rally is due to the overall exuberance in the markets… I am neutral on the sector and would advise investors to book profits," says Ambareesh Baliga, an independent market expert. 

G Chokkalingan, founder and chief investment strategist at Equinomics Research, meanwhile, says investors should hold least leveraged stocks in the sector and exit overvalued and highly leveraged stocks.

Both, Baliga and Chokkalingam, suggest buying Coal India at current levels as most of the other power stocks have gone up substantially.

As per data provided by the Power Ministry, the industrial and commercial power demand in the country grew at 12.6 per cent in the first week of June to 25.36 billion units (BU). This was, however, 3.35 per cent lower on a monthly basis from 26.24 BU, consumed in the first week of May this year.

Furthermore, power generation during May 2021, which although grew 8 per cent YoY on low base from lockdowns in May 2020, was 4 per cent lower on a 2-year CAGR basis. The fall continued in June 2021 as well where data for the first week of the month shows 2-year CAGR of -5 per cent.

“Industrialised states in North / West India witnessed stronger power demand growth on a 2-year CAGR basis between March 2019 and March 2021 (Maharashtra – 8 per cent, Gujarat – 7 per cent, Uttar Pradesh – 7 per cent, and Punjab – 6 per cent). However, May data is showing signs of growth slackening with Maharashtra and Gujarat CAGR showing de-growth of 2 per cent/5 per cent in May compared with 7-8 per cent growth in March,” note analysts at JM Financial.

All India thermal power capacity addition, the brokerage says, too continues to remain muted with 2.4 gigawatt (GW) of thermal and 6.2 GW of renewable energy (RE) being added in FY21 compared with 4.5 GW and 9.1 GW in FY20, respectively. Even on a year-to-date (YTD) basis, FY22 has seen addition of only 0.6GW of RE. 

Rating agency CARE Ratings has attributed lower capacity addition to the lockdown led to supply side disruptions, labour shortages as well as the constrained finances and liquidity pressures faced by the developers. Also, the restriction on the imports of inputs viz. for solar power has aggravated the constraints faced by the developers, it said in a recent sector report.

Road ahead
CARE Ratings expects electricity generation to grow by 5 to 7 per cent in FY22 from that in FY21 while those at JM Financials opine a recovery in thermal power capex is possible only beyond FY23-24 as demand catches up with under-utilised capacity.

Given this, Likhita Chepa, senior research analyst at CapitalVia Global Research, suggests including Torrent Power and Power Grid in one's portfolio from a medium-to-long term perspective on the back of strong fundamentals.

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