Budget 2025: Thermal faces challenges, but renewables could see benefits in budget

Renewable Energy in Focus

While power-related announcements are typically spread throughout the year, experts are closely monitoring the budget for updates in the renewable sector.

“Last year, initiatives like the PM Solar Rooftop Program and pump storage projects were introduced. The subsidy was expected to help achieve 30 GW of rooftop solar capacity in 2-3 years. As renewable energy grows, the demand for storage solutions becomes even more critical,” says Satyajit Jain of Ambit.

Shivam Bajaj of Avener Capital highlights that the focus in the power sector has been on smart metering, with significant project rollouts anticipated.

“In the Transmission and Distribution (T&D) segment, the main challenge has been the slow pace of project execution and capital expenditure. Increased CAPEX allocations could accelerate these projects, particularly on the renewable energy side,” he says. Bajaj also anticipates significant budget allocations for railways and renewable energy, with an emphasis on strengthening underdeveloped transmission and distribution infrastructure to achieve widespread power coverage.

Thermal Power Challenges

In the thermal power sector, JM Financial’s Sudhanshu Bhansal explains that the government aims to add 80 GW of power generation capacity over the next 5-6 years. “Last year, a special grant was announced for advanced supercritical thermal power plants. While the plans are clear, the main concern lies in capacity addition. Domestic manufacturing capabilities are lacking, creating complexities. Incentives may be introduced to encourage companies to restart manufacturing thermal power equipment,” he said.

Religare Broking's Ravi Singh believes there won’t be much focus on conventional energy in this budget. Despite increasing power demand, he feels the government is constrained in its ability to make significant moves. Singh explains, “The government appears constrained in its ability to provide specific support mechanisms. Everyone expects action, but I don’t think power or renewable energy will receive much in this budget.”

Sector Growth and Market Sentiments

In a pre-budget report, a Jefferies analyst highlighted that power CAPEX is projected to achieve the highest CAGR among sub-sectors, driven by 7 percent YoY power demand growth, peak power deficits, and a projected Rs 23 lakh crore CAPEX for FY2024-30E (2.2x growth). "Companies like Siemens, KEI (with over 30 percent of revenues from transmission), and Thermax (focusing on captive power) are identified as key beneficiaries," the report adds.

Rupesh Sankhe of Elara Capital notes that for the power sector CAPEX primarily comes from NTPC, state governments, or private utilities, with government support mostly limited to budget allocations. Sankhe adds that renewable energy companies and financing entities like PFC and REC, which provide debt financing for 80 percent of power sector CAPEX, will be closely monitored.

Valuations and Opportunities

While short-term challenges persist due to moderated power demand, Bhansal believes structural demand will remain robust. He expects utilities with strong execution capabilities to capture the largest share of opportunities. “Thanks to recent market corrections, valuations are now in a comfortable zone,” he adds.

Sankhe concurs, stating that market corrections of 10-15 percent have brought stock valuations to reasonable levels. “Previously, EV/EBITDA multiples had reached 15-16x, but they now stand at 12-13x. This creates growth opportunities for the next 10-15 years, supported by strong balance sheets and cash flows,” he explains.

However, he cautions that segments like solar cell and module manufacturers may face pricing pressures due to potential oversupply. In contrast, power generation companies are well-positioned to capitalise on emerging opportunities and offer better value at current valuations.

Singh adds that stocks in the power sector are already undervalued, with corrections of 30-40 percent from their highs. Compared to international renewable energy and power sector stocks, he notes that Indian stocks already trade at higher levels. When you compare with international markets, this correction seems acceptable, and perhaps a further 3-5 percent decline wouldn't be an issue.

"Peer comparisons show that stocks are now in the range of their real value. Additionally, during weak market conditions, stocks in this sector have corrected only 20-30 percent, indicating circulation value remains high. Stocks are now at an average range or market price compared to peers, which highlights the potential for renewed investor interest," he said.

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