Liquidity injection package with reform will help the power sector going forward. CLSA recommends buying on NTPC, Power Grid and JSW Energy as defensive growth at deep value multiples. They recommend buying on NTPC at a current market price of Rs 83 with a target of Rs 140. (69% upside potential)and buy on Power Grid at a current market price of Rs 158 with a target of Rs 205. (30% upside potential)

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Reform-led liquidity injection starts: U.S. $18 bn discom liquidity injection package with reform backed in:

The PFC and REC U.S. $12 bn liquidity injection will help lubricate the power sector & silently help improve discoms situation ofU.S. $16bn government receivables and moving it towards direct benefit transfer. The size of the package has already increased to U.S. $18 bn to find discoms losses due to Q1 demand destruction. CLSA is also excited about the draft allowing the timely pass through of change in law claims against discoms,which would lead to automatic tariff hikes. All these measures will not only improve liquidity but also drive growth for NTPC, JSW Energy, PFC & REC. In the second half of FY21, CLSA looks towards the next set of reforms: a national tariff policy, amendments to the Electricity Act and the Rs 2 trillion funding scheme for discoms to achieve sustainability.

Tariff hikes ahead with new draft norms for timely cost pass through:

The Ministry of Power has issued draft electricity (change in law; must run status) rules for 2020 to ensure any change in law claims against IPP (Independent power producers)/discoms will be reflected in the tariff in 90 days. This should ensure discoms do not have to wait for the tariff order to pass through the cost hike and enjoy automatic tariff hikes to restore their financials. This should ring the fence, a few discom financials likely to be impacted by large changes in law claims of private IPPs such as Adani Power, apart from others. Order helps reduce backing down of renewables by diverting unwanted power for trading.

Power demand ahead of economic growth: 

September up 4.6% YoY led by NTPC, up 13% Q2 FY21 ended on a good note (generation +1%) with September generation up 4% YoY, the first positive demand print since lock down was imposed at the end of March, led by industrial and commercial. This is versus likely GDP growth of negative 9.5%. Thermal play is key to growth. With its ability to be a firm power, thermal power emerged as the backbone of the grid during the post Covid-19 recovery when renewables (RE) faltered. In September, when demand recovered (+4.6%), thermal generation rose 9% vs RE -3%. This Helped companies like NTPC (up 13% YoY in September) backed by solid performance at new plants like Lara. Overall, NTPC grew Q2 generation 9% YoY vs India’s +1% YoY. RE generation fell 3% as wind was down 18% YoY. The economic recovery and low base in the second half will support power demand to rise 7% YoYin the second half vs a first half decline of 7%. This should improve demand for NTPC’s new plants. 

Q2: Core growth robust at regulated utilities; focus shifts to renewables

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CLSA says while Q1 results surprised for power utilities, Q2 core growth remains solid. NTPC’s regulated equity should grow 9% YoY and its share of non-coal generation (group) rose to 11% from 6% in Q2 FY20. It will account its last Covid-19 rebate in Q2. Power Grid should have the best Q2 with the start of the HVDC (High-voltage direct current) line and PAT up 13% YoY. JSW Energy won its first RE project to take its non-fossil capacity to 41% by FY22.

(Authored by Rahul Kamdar)