The debt recast plan for state electricity boards has seen power sector stocks post a 10% gain in the past fortnight. But even over a three-month time frame, they have barely kept up with gains in the broader market.

As this column has pointed out, the benefit for listed power producers from the debt recast may take quite some time in coming. The September quarter earnings season, too, is unlikely to provide any fillip to stock prices.

As in the past couple of quarters, earnings are likely to be dented by fuel scarcity and the consequent loss in potential output. In July and August, the two months for which data is available, power generation in the country grew 2% from a year ago. That compared with a 6% increase in the June quarter and a 10.74% increase last September.

The problem is a familiar one—coal scarcity and a reluctance among distribution companies to lift power. Plant load factors, or capacity utilization, for thermal power plants dipped to 66.8% in June and further to 61.5% in July, according to numbers from the Central Electricity Authority. These show that fuel scarcity problems haven’t gone away despite the much-touted directive from the Prime Minister’s Office to Coal India Ltd to supply adequate coal.

The upshot is that reliance on imported coal has increased. For sure, international coal prices declined by around 6% in the September quarter. But the sharp depreciation of the rupee effectively lopped off one-third of the gains for coal importers. Still, it comes as a relief to power generators and may help contain an earnings decline.

Overall, though, the consensus brokerage forecasts veer towards muted single-digit growth in revenue for power producers and yet another quarter of decline in net profit.

What about the outlook for the sector? One positive for the sector is that capacity addition has been happening at a decent clip; in the last year, about 23,000 megawatts have been commissioned. The decline in coal prices along with the recent rupee appreciation, if it’s sustained, should help boost earnings from the current quarter onwards. More clarity on the debt recast plans and consequent hikes in power tariffs should also augur well for power companies. But the bottom line is that power generation should increase for earnings to grow. That is the only way the current rally in power stocks can be sustained.

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