Electric utility stocks have seen significant rallies, with some increasing between 20-76 percent over the past six months, but the rise seems to be primarily driven by re-rating of valuation multiples rather than substantial changes in earnings expectations.
According to a recent report by Kotak Institutional Equities, electric utilities have rallied on expected increase in investments for setting up new power capacities and related T&D infrastructure.
“While we do concede the need for new investments following the moderated pace of capacity addition in the past decade, we highlight that the earnings benefit from such investments will only trickle in beyond FY2030, implying an early-teen CAGR in earnings for private utilities, and single-digit growth for the larger PSUs,” states the report.
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“The sector's current valuation multiples suggest high expectations of earnings growth and execution, posing a risk if these are not met,” it adds while highlighting that the current valuations are 21X P/E and 2.5X P/B on FY2026E.
Further, the report notes that four out of six electric utilities companies under coverage reported flat-to-declining earnings in FY2024, despite trading at multiples ranging from 14-37X P/E and 1.8-4.0X P/B (FY2026E).
NTPC's FY24 profit was Rs 17,200 crore, with a 23% PAT growth to Rs 21,300 crore aided by other income and JV profits. Power Grid's PAT was Rs 15,600 crore with low earnings growth.
Meanwhile, NHPC’s PAT declined to Rs 3,600 crore due to lower generation from floods and reduced rainfall while Tata Power's PAT grew 3% to Rs 3,400 crore, driven by the renewable sector despite coal earnings decline.
CESC’s earnings were stable with Rs 1,370 crore PAT, exploring new renewable investments.
Incidentally, the only company that reported healthy growth was JSW Energy whose EBITDA grew 64% to Rs 5,380 crore. This growth came on the back of acquired assets as well as higher contribution from merchant sales “although valuations at 37X P/E (FY2026E) already capture the positives and more,” as per the report.
Growing power demand
India's power demand has increased by 7.3 percent year-on-year in FY2024, reaching 1,626 billion units (BU), closely matching the country's GDP growth of 7.2 percent.
Kotak Institutional Equities forecasts a 5.7 percent CAGR in power demand from FY2024 to FY2030, aligned with expected real GDP growth, although high single-digit growth expectations are likely misplaced due to various factors including seasonal variations.
Over the past five years, power demand has seen a compound annual growth rate (CAGR) of 5 percent, compared to a GDP CAGR of 4.4 percent.
Capacity Addition and Tight Demand-Supply Balance
India added 25.9 gigawatts (GW) of power capacity in FY2024, an improvement over the average annual addition of 15 GW in the previous five years. The total installed capacity reached 442 GW by March 2024, with coal and renewable capacities constituting the major shares.
The Kotak report, however, notes that adjusting for the plant load factor (PLF), the throughput capacity stands at 201 GW against an average base demand of 186 GW. This they believe indicates a tight demand-supply balance, especially during peak seasons.
In FY24, only 8 GW were added. Kotak Institutional Equities notes that there is a need for accelerated capacity addition, especially renewable capacity expansion, estimated at 27 GW per annum, to balance the demand if it is required to be met through renewables alone.
Weather patterns, including less severe summers, and efficiency gains are key factors affecting power demand. While rising income levels and industrialisation are expected to boost demand, gains in energy efficiency and other offsetting factors may constrain demand growth to high single digits.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.