Power sector witness strong demand outlook in first 2 months of FY23 – Brokerage sees up to 38% upside in NTPC, CESC, NHPC

The first two months of FY23 witnessed a strong generation power on the back of robust demand, a domestic brokerage firm Emkay Research said. It added that the power generation grew by 17 per cent, while thermal and renewable energy (RE) generation up by 15and 32 per cent year-on-year.

The Ministry of Power recently detailed a mechanism for allowing flexibility in the generation and scheduling of thermal power stations. As per the ministry, there is scope for the replacement of thermal power with RE power in the country.

This will increase generation through RE sources, reduce emissions and enable compliance with renewable purchase obligations, the brokerage firm said.

While the existing regulations of CERC define a technical minimum of 55 per cent for the operation of thermal power plants, the ministry has highlighted that a reduction in this technical minimum to 40 per cent is feasible in 2-3 years.

On the back of a strong outlook, the brokerage picks three power generation stocks such as NTPC, CESC, and NHPC with an upside of up to 38 per cent.  

For NTPC, the brokerage has a Buy rating with a target price of Rs 180 per share (16 per cent upside) as the company remains a play on large fossil assets with robust cash flow, along with strong growth in the RE space.

The stock price of NTPC has increased by more than 40 per cent in the last year, but it still trades at ~1x PB on FY24E with an RoE of ~12% and an earnings CAGR of 6-7%. The company intends to float an IPO or invite a strategic investor for its RE portfolio in FY23.

For CESC, Emkay maintained a Buy rating with a target price of Rs 108 per share (38 per cent upside: The key issues in the company’s license areas are low demand and no increase in tariffs. The stock trades at 0.85x FY24E book and 6.6x FY24 earnings.

Similarly, for NHPC, it maintained a Buy rating with a revised target price of Rs 40 from Rs 37 apiece (21 per cent upside), as the company is expected to commission 2,800 MW of hydro capacity over the next 2 odd years. The stock trades at 9.3x/7.6x PE on FY24E/FY25E.