Conventional energy: macro remains hazy but company specifics begin to appeal
Macro view of the conventional energy sector remains unappealing. Demand continues to grow at a sedate pace. Utilization levels remain sub-optimal and the government and the financial institutions are yet to find a meaningful solution for stressed projects.
Yet, from the equity markets’ and the listed companies’ perspective, there are enough reasons for investors to continue to keep a close watch on the sector. Apart from the central government’s push to revive and improve the distribution sector (a major reason for most of the industry’s ills now), there are two sets of supportive factors.
One of them is the spike in thermal power generation and spot power tariffs in August 2017. Many reasons were attributed for that— unusual drop in wind and hydropower generation, maintenance outages of thermal capacities and coal shortage. But the situation also illustrated the shortcomings of renewable power—it is variable in nature. Importantly, it highlighted the importance of conventional energy, especially thermal power, to continue to meet India’s energy needs.
The second set of reasons emanate from company-specific developments. NTPC Ltd, the largest power generator, is on the cusp of a capacity addition-led earnings growth. “There was a record 3.3GW addition to commercial capacity at group level in 2QFY18. NTPC is likely to add 15GW of capacity over FY19-21. This will drive healthy growth in regulated equity, the key earnings driver,” Motilal Oswal Securities Ltd said in a note on NTPC. GW stands for gigawatt. One GW equals 1000 megawatts.
Another state-owned power producer NHPC Ltd has two power units lined up for commissioning— one in the March quarter and another in the next fiscal year. So, even as the company faces execution challenges in its larger projects, low valuations and project pipeline are seen as key triggers for the stock.
In the private sector, CESC Ltd’s troubled Chandrapur power plant emerged as the lowest bidder for the supply of electricity to a Mumbai utility. If the deal is clinched, then losses at the power unit will come down, leading to earnings accretion at the parent entity. Another private sector power producer, JSW Energy Ltd, tied up its entire hydropower capacity with long-term purchase contracts, though some of the company’s thermal capacities remain exposed to short-term power contracts.
Of course, Tata Power Co. Ltd and Adani Power Ltd continue to struggle with unviable power purchase agreements. But the companies are trying to find a way out (such as asking states to take over the plants concerned).
Overall, seen from the individual companies’ perspective, things are beginning to fall in place. The pace of the resolution process and achievement of the targeted plans will determine the rewards for investors.
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