Power Stocks Outperform In 2021

The power sector is instrumental to the overall growth needs of India as a developing country. It assumes strategic importance and yet the sector has rarely been in the news for its wealth creation opportunities. Power stocks are known to provide stability to the portfolio, are less volatile and do provide good dividends to long-term investors. The DSIJ Team shares the major trends that may impact the fortunes of the power sector in 2021

Adani Greens is ranked as the largest solar power developer in the world by US-based MERCOM Capital. The above factual statement by Adani Green shows the opportunities some of the companies in the power sector with strong balance sheets have for themselves in the new world which is environment conscious. In 2021 the power demand is expected to gradually improve and experts believe the growth in power demand will be in high single-digit, in line with the expected GDP growth. While the demand is expected to increase gradually, there are companies in the power sector that are contributing to a progressive new world with minimal environmental hazards while generating power.

There is no doubt that green energy is the way forward for several countries. Following are some of the major trends that may impact the fortunes of the power sector in 2021:

Policy Reforms

The Indian power sector has undergone a significant transformation that has reshaped the industry outlook via path-breaking policy initiatives like UDAY, Power for All and UJALA, among others, over the last few years. The reforms introduced for the distribution companies (discoms) had witnessed limited financial success while the latest policy reforms like payment security mechanism, power-cut penalisation and the Electricity Amendment Bill will contribute primarily to bringing in efficiencies into the sector. India has already started the process of privatisation of its power distribution territories in the Union Territories (UTs), with bids demanding for purchase of the entire 100 per cent stake in the Chandigarh discom.

At the same time, in the future a similar privatisation drive for state transmission companies should be undertaken in order to free up government capital as well as allow parity with industry efficiency. It is also possible that the government may be inclined to re-initiate discussions regarding ‘carriage and content separation’ which would give an edge to endconsumers to make a choice regarding whom they want the electricity from, just the way telecom operators work. This would infuse competition, imposing discoms to enhance their performance standards and adopt an approach that will concentrate more on consumers rather than playing with geographical monopolies.

Renewable Energy

Renewable energy is expected to grab the lion’s share of fresh capacity expansion over the next four to five years. The aim is to help achieve India’s commitment to increase renewable share in total generation to 40 per cent by fiscal 2030 from the current 25 per cent as part of the Paris Climate Agreement. India is expected to be the largest contributor to the renewable upswing in 2021 even as the country’s annual additions are expected to double in 2021 compared to 2020. To help achieve the ambitious targets there exist a strong government incentive (fiscal and regulatory), support in the form of viability gap funding and execution support in terms of land and evacuation infrastructure.

Private investors are also encouraged by ensuring better payment security mechanism and enforcement of signed PPAs to avoid tariff-related disputes. It is expected that the availability of low-cost finance will help support capacity addition and may make it viable for private players to invest in the sector as profitability increases. Energy storage solutions and dynamic load management needs improvement and we may see a good amount of money flowing in that direction which may facilitate smooth functioning of the plants connected to the grid.

Emphasis on Transmission

Transmission is an integral part of the power sector without which the power sector won’t be able to sustain. Generally, for us to enjoy steady, uninterrupted and throughout supply of electricity, every megawatt of new generation capacity has to be matched with a certain transformation capacity added to the system. Even then, the transmission sector is far away from the limelight. With clean and renewable energy taking to the forefront globally, the transmission sector is expected to see some considerable developments. While renewable power generating companies have been engaging in large-scale projects, generally these wind and solar grid plants are located in exterior areas.

Hence, going forward, grid expansions and connectivity will be the main focus points for the sector’s growth. Additionally, the Indian government has been putting a lot of emphasis on ‘power for all’, striving to make power available in the farfetched areas of the country as well. This is undoubtedly a big boost to the power sector. The increasing participation of private players will not only benefit the growth of this sector but also the transmission sector.

Private Participation

Private participation has always been thought of as fuel for the sector’s growth. But the corona virus pandemic has created liquidity issues throughout the world, forcing many to take a cautious approach. In contrast to the major world economies, India has been able to quickly bounce back from the shock of the pandemic and continues to remain unfazed even during the second wave of the pandemic. This has turned out to be an advantage for the economy coupled with the government’s self-reliance strategy that has accelerated growth in the economy. This surely paves the way for investments opportunities in under-penetrated markets, thereby attracting foreign capital investments. Hence, keeping this in mind, going forward, attractive investments are expected to be made in the Indian infrastructure primarily through InvITs and REITs.

Power Stocks’ Performance on Bourses

The BSE Power index has been one of the best performing sectoral indices recently. In the past couple of weeks, the index has been up by more than 8 per cent and has outperformed every other sectoral index. On YTD basis, when the Sensex has been up by 4.8 per cent the BSE Power index has gained more than 30 per cent, indicating the momentum and value in the sector for the investors. The table below highlights the performance of some of the biggest power sector players on the bourses.

Conclusion

The power sector is a capital-intensive sector. Looking at the growing demand for power in the country and the transmission needs, there is a sizeable investment opportunity for investors in the sector. The performance of power sector stocks on bourses is just a precursor to what lies ahead of us in the sector. Investors at best should look at the opportunities in this sector with an open mind and include power sector stocks after conducting thorough financial health check, due diligence and cash flow analysis.