Motilal Oswal believes merchant capacities with low variable cost will either be able to seek power purchase agreements (PPAs) or realise better margins in merchant sales.
The beginning of correction in Indian power oversupply, improving plant load factor, drying up of new investments in the sector and the likely rise in merchant prices are enough reasons for research firm Motilal Oswal to bet on the energy space.
"Indian power oversupply has started correcting on tapering of capacity addition and accelerated retirements. Plant load factor (PLF) has started improving after seven years of descend," it said in its note.
Although India has achieved peak PLF of 63 percent for conventional power generation in FY10, the research house expects next peak PLF to be much lower around 56 percent in FY22E due to displacement by renewable energy.
It further expects market to balance in three-to-four years unless there is a major breakthrough in storage technology.
As new investments have dried up and it takes 3-5 years to build new brownfield capacities, India will move from overcapacity today to shortage in three to four years, Motilal Oswal said.
As we move towards market balance, margins in merchant power business will trend up, it feels.
Here is the list of five power stocks from Motilal Oswal, which could give around 37-56 percent return:-
Jindal Steel & Power: Buy | Target - Rs 348 | Return - 56 percent
Motilal Oswal believes merchant capacities with low variable cost will either be able to seek power purchase agreements (PPAs) or realise better margins in merchant sales. The biggest gain in equity value is likely to accrue to Jindal steel and Power.
With over 2GW of merchant capacities in the heart of the coal mining belt, it believes JSPL, which is also riding a strong steel cycle, is the best play from a perspective of 2-3 years. We reiterate Buy.
Power Grid Corporation: Buy | Target - Rs 284 | Return - 43 percent
Power Grid has a strong regulated order pipeline which provides visibility of earnings growth.
It has competitive edge, long-term growth opportunity, best-in-class RoE and trading at undemanding valuations. Maintain Buy.
NTPC: Buy | Target - Rs 215 | Return - 37 percent
NTPC will benefit from higher PLF incentives and operating efficiencies. Motilal Oswal expects project execution to improve, as states start falling short of supply. Maintain Buy.
CESC: Buy | Target - Rs 1,407 | Return - 50 percent
CESC has strong business models in distribution and generation, which help generate double-digit return on equity (RoE).
Its retail business is on the verge of turnaround. The demerger will unlock value.
CESC's open capacity of 300MW at Dhariwal would benefit from higher merchant power prices. Maintain Buy.
NHPC: Buy | Target - Rs 36 | Return - 43 percent
NHPC's earnings growth will accelerate as projects gets commissioned driving regulated equity growth.
Earnings growth will also be aided by declining under-recovery in operations & maintenance (O&M) and capital cost on few projects.
The stock is trading at attractive valuations and dividend yield. Maintain Buy.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.