POWER

With Q2 performances starting to roll out, Here's our take on the Power sector as to how the entire is fairing coming back to its growth track.

Power generation witnessed 5% YoY growth in Q2FY23 as against ~17% during Q1FY23, which had the impact of a low base due to Covid19. Notably, the Jul-Aug 2022 period saw low generation growth due to heavy rains (up 30% year om year) over the period. Both residential and agricultural demand has high co-relation to weather conditions. Sep-22 saw ~11% generation growth, with Hydro/Thermal generation being up 24%/9%, respectively. For the quarter, Hydro/Thermal/RE generation growth stood at 14%/2.5%/8.5% YoY, respectively. On a 3-year CAGR basis, growth for the quarter was 5%, which also corresponds to the long-term power demand growth in the country. Other data points such as coal production reported 11%/20% YoY growth for the 2QFY23/H1FY23 period. Coal dispatch is up 5%/8% YoY for 2QFY23/H1FY23.

During 2QFY23, generation for NTPC (Standalone) grew by ~9% YoY, which is far better than the total Indian thermal generation growth of 2.5% YoY. Generation from NTPC’s key subsidiaries/JVs grew by 34% YoY on the back of higher capacity and improved PLF. NTPC is expected to monetize its RE assets in the near future, and continues to target +60GW RE assets by 2032. Incremental thermal assets (5GW planned) will add to the steady earnings growth. The stock price of NTPC has increased by over 50% in the last one year, but still trades at ~1x P/B on FY25E, with ~12% RoE and 6-7% earnings CAGR.

Power Grid will not be taking any stake in REC (as clarified by the Ministry), it is believed that the stock provides decent upside from the current level. While transmission intensity may have declined in the last few years, the medium-term outlook clearly indicates 5-6% growth in PWGR’s earnings. Our Jun-23 TP of Rs250/share is based on SoTP analysis. At the CMP, dividend yield stands at ~6%. Intra-state transmission opportunities and smart metering-related investment remain key monitorables, apart from inter-state opportunities.?

CESC to be in buy mode with medium-term tie-up for the ~200MW with the Railways from the Chandrapura plant has started from 1QFY23 and will result in FY23 PAT of Rs2-2.5bn vs. Rs1.2bn in FY22. In FY22, the Kota circle reported loss of ~Rs500mn; this can come down over the next 12 months. The base Kolkata business continues with a Rs8-8.5bn profit. While there has not been any tariff increase, capex has been approved by the Regulator. Presently, dividend stands at Rs4.5-5/share, implying 5.5% dividend yield. The FY25 book value stands at Rs98, with 13% RoE. All utilities are trading at around the book value or higher; hence, CESC should re-rate.?

?Due to incessant rain and high discharge at the Subansiri Lower HE Project (2,000MW), partial flooding of Power House happened on 25-Sep-22. All requisite measures have been/are being taken by NHPC, to protect the structure and minimize any consequential losses. NHPC is expected to commission 2,800MW of hydro capacity (50% of its present capacity of 5.5GW) over the next two years. Parbati II (800MW) and Subansiri (2,000MW) are at advanced stages of construction; together, they will add Rs90bn to the regulated equity (up from Rs130bn to Rs220) over the next 2-3 years. This will lead to improvement in RoE, from 9.5% to ~11% by FY2025. We expect EPS CAGR of ~11% over FY22-25E.