Q3 power sector earnings preview: Optimism continues, earnings expected to be mixed

While the power demand and generation has been high, power generation, according to Elara Securities, rose 4.5 percent YoY in December 2023 to 135 billion units (BU).

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Power companies are expected to report healthy earnings for the December quarter of FY24, driven by increased demand during the festival season. Earlier this month, a Jefferies report said momentum will likely continue in the power sector if monthly demand stays at 7 percent or higher. This aligns with the government's focus on increasing investments and expanding capacities in the sector.

Also read: NTPC Green Energy signs two pacts for green hydrogen projects in Gujarat

Analysts expect a muted quarter despite demand; still positive on sector

While the power demand and generation has been high, power generation, according to Elara Securities, rose 4.5 percent YoY in December 2023 to 135 billion units (BU).  According to the brokerage, this modest growth was on a high base of December 2022, which saw a 14 percent YoY rise. "The slight uptick in generation can be linked to decreased cooling demand during winters, thus deviating from the strong trend seen in the preceding three months," the report added.

While JM Financial expects the companies under coverage to report 6 percent YoY revenue growth driven by 11 percent YoY growth in power demand, they estimate that earnings  will remain flat in the quarter. But overall, the brokerage adds that they "remain positive on the utilities space with likely stability in power demand, pickup in thermal capex and continued momentum in RE additions."

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Going ahead, they expect demand for power (which is significantly higher than all earlier growth rates) to continue to grow. "We expect peak demand to remain high going forward along with sustenance of robust power demand on the back of pick-up in industrial activities and general elections," the brokerage added.

Renewable power continues to lead the way

In a December 2023 report, Kotak Securities analysts said that India has steadily improved its renewable capacity to 179 GW as of October 2023 (including hydro capacities) even though the pace of addition has been slow in recent years. The government is targeting 500 GW of renewable capacity by FY2030E. "While the key players have lined up impressive plans to set up renewable capacities, execution has been patchy so far," the report added.

Also read: MC Exclusive | RK Singh seeks more funds for power sector, sops for green hydrogen

Top power sector picks in the run up to Q3FY24 results

Top picks in the sector include NTPC, NHPC, and IEX. Analysts at Elara Capital project healthy growth for JSW Energy, driven by incremental earnings from acquired renewable assets and capacity additions. However, NHPC and SJVN are expected to see marginal growth due to irregular rainfall and unusual dryness affecting hydro generation.

NHPC revenue may fall marginally, offset by a 6 percent YoY increase in PAT, attributed to assured return and incentive income. Elara Capital anticipates a 2 percent YoY revenue increase for the sector and positive growth for Indian Energy Exchange, with an 18 percent YoY rise in revenue to Rs 1.2 billion and PAT increasing by 13 percent YoY to Rs 875 million in Q3.

Most analysts expect Power Grid to report a flattish quarter with order conversion to earnings expected to take time. JM Financial analysts estimate net sales at Rs 115 billion, and EBITDA margin of 86 percent.

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.