The power segment received a significant boost in the FY24 budget, with a 58 percent increase in allocation to Rs 20,671 crore. Analysts anticipate continued attention on this sector in the FY25 budget.
Although the upcoming budget is an interim one, it is expected to lay the groundwork for future policy decisions. Most brokerages anticipate a focus on fiscal consolidation and priorities regarding capital and non-capital expenditure.
Also read: Thermal power plants' capacity utilisation to rise to 69% in FY'25: ICRA
"We anticipate the policy direction and priorities to align closely with recent budgets, as the government navigates between fostering growth recovery and managing challenging debt dynamics," Elara Capital said in a recent report.
Additional momentum
The report specifically highlights the inclusion of further details about the recently launched Pradhanmantri Suryodaya Yojana, a scheme to make electricity affordable and make India self-reliant in power.
Anticipated announcements in the interim budget include higher capital expenditure for renewable energy, incentives for green initiatives, and production-linked incentives (PLIs) for solar module manufacturing.
Additionally, the report suggests expectations for dynamic feed-in tariffs, grid modernisation to better integrate intermittent renewable energy sources, and capital spending on battery storage infrastructure. Other anticipated measures include a potential reduction in customs duty on solar cells to 5 percent from 25 percent and an extension of the waiver on inter-state transmission system charges for renewable projects commissioned beyond June 2025.
Sagar Lele, co-founder of Rupeeting, is betting on the power growth story and expects more push on renewable energy, with a focus on incentives for module manufacturing and building an ecosystem for renewable energy.
“The overall direction will be to ensure that there is capacity so that demand is fulfilled, whether that is thermal or renewable. And on the 2030 goals, whether it is solar, wind, or green hydrogen, the goal will be to get some policy initiatives in place to build the ecosystem to facilitate our targets,” he said.
Nuvama Institutional Equities estimates that the government may also focus on indigenous energy storage technology development and renewable power supply, which should address energy security and material sustainability.
“There should be sufficient allocation in decentralised renewable energy and energy access to make it mainstream to the country's green growth,” it said.
Power sector view
Lele is positive about the power sector given the investment amounts, government reforms, and measures being taken to overcome the power deficit, such as extending Section 11 of the Electricity Act, under which the government can ask power-generating companies to override guidelines under extraordinary circumstances to maintain output.
The government has added 194,394 MW of generation capacity in the past nine years, the ministry of power said on January 2. The present installed capacity of power generation is about 426,132 MW. Of the generation capacity of 9,943 MW added in the FY24, about 1,674 MW was based on fossil fuel sources and 8,269 MW on renewable energy, the ministry said.
IIFL Securities analysts said recent comments by the power ministry suggest the government is looking at stepping up coal-based capacity addition to meet rising demand.
“This is in addition to the more than 350GW RE capacity addition that the government has envisaged by 2032. And to that extent, the entire sector offers a significant runway for growth over the next 8-10 years,” the analysts said.
In the renewable space, according to a November 2023 Kotak Institutional Equities report, the government is targeting 500 GW of renewable capacity by FY30 and has improved renewable auctioning from ~15 GW annual run-rate to 20 GW for YTD FY24, with plans to achieve 50 GW of annual auctions for the remainder of FY24. It added that while key players have lined up plans to set up renewable energy capacities, execution has been patchy so far.
Analysts estimate power capex to continue to grow over the next 2-3 years. In a September 2023 Jefferies report, analysts said power capex should grow 9x at a CAGR of 20 percent during FY23-26, up from 2.2 percent during FY10-20.
As India enters a phase of capex-driven GDP growth, Jefferies said power intensity should rise.
“We expect annual thermal PLFs to cross 80 percent by FY2025E, above a two-decade peak. Power generation and T&D investments should rise 2.2x to $280 billion in FY24E-30E vs. FY2017-2023,” it said.
Power stocks to track before and after Budget 2024
With the interim budget expectations, stocks with renewable energy capability are expected to make some gains during and after the budget.
Analysts at JM Financial said in a recent report that they are positive on growth opportunities for the NHPC stock as it is one of the largest hydropower-generating utilities in the country with an aggregate installed capacity of 7,071 MW. This is 15 percent of India’s installed hydropower capacity.
“With 10,515 MW of projects under construction (hydro and renewables), the company’s installed capacity with regulated return is set to grow by 3,420 MW by FY2026, up by 50 percent after a gap of 3 years, resulting in revenue growth of 20 percent and a net profit CAGR of 11 percent over FY23–26E," the analysts said in the report. NHPC is also the “only large utility with a 100 percent green energy portfolio,” they said.
While NHPC’s Q2 results missed estimates on account of lower generation due to lower water levels in reservoirs and flash floods in Himachal Pradesh, Elara analysts remain positive on the stock due to visibility from ongoing projects.
NHPC has 15 projects (hydro and solar) of 10,449 MW under construction, including two units of the 8x250 MW Subansiri project that are expected to be commissioned in Q4, two units of 4x200 MW Parbati-II in early FY25, and the remaining units progressively by Q2 of FY25.
In the private sector, Tata Power is one of the largest renewable energy companies, with a clean energy portfolio of 5,500 MW, which includes solar, wind, and hydropower.
“The company plans to achieve 70 percent clean power generation by FY30 and plans to meet this target by installing between 1.5 and 2 GW of renewable energy annually. By FY2027, the company plans to incur a capex of Rs 60,000 crore, with around 45 percent of the capex being spent on renewable projects,” Sharekhan by BNP Paribas said in a report.
Recently, the management of Power Grid Corporation of India increased its FY24 capex target to Rs 10,000 crore from Rs 8,800 crore. Analysts estimate the capex will move up due to the spending of Rs 12,500 crore and capitalisation of Rs 17,000 crore for FY25.
“Longer term, the company has a Rs 1.9 lakh crore capex plan for the next decade that includes around Rs 1.7 lakh crore for transmission infrastructure, Rs 0.1 crore for solar generation, Rs 0.15 crore for smart metering infrastructure, and Rs 0.10 crore for the data centre business,” BoB Capital said in a report.
BoB Capital values the company at 2.1x. According to the report, Power Grid warrants a higher valuation due to “its superior ROE of 15-19 percent, high 5.6 percent dividend yield in FY2023, and lowest risk profile in the power sector."
NTPC currently accounted for 17 percent of India’s installed capacity and 25 percent of the total power generation in FY23. According to analysts at Axis Securities, NTPC's substantial portfolio in conventional power, with a firm cost-plus business model, positions it well in a growing peak power cycle.
“This structure contributes to stable cash flows and will facilitate growth led by renewable energy,” Axis said.
NTPC has around 10 GW of thermal capacity under construction, which is expected to be commissioned by FY26. NTPC has a target of 60 GW of renewable capacity by FY32, up from the current 3.3 GW.
Analysts estimate that until the elections, there may not be a slowdown in sentiment or stock price. Over the past year, stocks in the segment have seen healthy gains, with NTPC and NHPC shares gaining over 90 percent, recently listed IREDA with almost 2x returns, and SJVN with about 3x returns.
IIFL Securities analyst said power capex, particularly generation, has a multiplier effect and will likely trigger a decadal long investment cycle, making the segment and associated companies a compelling play.
“We note that the power sector’s weight in the overall market is near multi-year lows, and has tremendous scope to improve with the expected investments planned to meet the rising demand,” the analysts said.
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