Sector watch: Power sector hopes for higher allocation, incentives as demand continues to soar

Stocks to watch include PFC, REC, and IREDA, which could benefit from increased allocations and private investments.

The power sector has a long list of demands and expectations from the upcoming Budget, but the key asks include those related to the renewable segment in terms of incentives and financing as well.

The industry anticipates support for the hydropower sector through the establishment of a nodal agency dedicated to hydropower development and incentives for pumped storage hydropower plants.

They also expect the Finance Ministry to extend the eligibility for the ISTS waiver for renewable projects beyond June 2025.

Analysts at Axis Securities, in their pre-budget note, highlighted that in order to achieve the target of 500 GW of renewable energy capacity by 2030, as set by the government, a significant boost is required for the renewable sector.

Also read: Budget 2024: Power sector seeks boost to renewable energy projects and financial support for discoms

They believe measures such as enhanced viability gap funding for battery storage, offshore wind plants, and solar energy, and increased public-private partnerships and sustainable financing for renewable projects could do the trick for the sector.

On the taxation front, the industry is also hoping for a reduction in GST on renewable energy components like solar devices, and the removal or reduction of customs duties on imported renewable components like solar modules and storage batteries.

To boost transition to sustainable energy, budgetary allocations are also expected for rooftop solar installations and alternative energy sources like compressed biogas (CBG), ethanol, and green hydrogen, stated a note by Axis Securities.

Incidentally, the National Green Hydrogen Mission, which saw its allocation increased to Rs 600 crore in the interim Budget, is expected to receive further boosts to promote green hydrogen energy in India.

Further, the Ministry of New and Renewable Energy (MNRE) is likely to receive a substantial boost, following the interim Budget announcement of a 65 percent jump in allocation to Rs 12,491 crore.

Power demand on the rise

India’s power demand has grown 7.3 percent YoY in FY24 while registering a five percent CAGR over last five years.

“From 2014 to 2021, power demand relative to GDP growth was around 0.8%, but it has now increased to 1.1-1.2 percent,” says Rupesh Sankhe, Vice President at Elara Capital.

This increase, he notes, is driven by higher per capita consumption and initiatives like Make in India and PLI schemes.

With peak demand projected to reach 370 GW by 2030, significant investment in thermal capacity and R&D for offshore wind, battery storage, and hydrogen data centres is expected, which, in turn, presents a Rs 42 lakh crore opportunity for relevant companies, he adds.

In a recent report, analysts at Kotak Institutional Equities noted that while the pace of capacity addition has picked up, we are still walking a tight rope.

Key stocks to watch

Power stocks have been rallying over the last one year with valuations in the power sector currently higher compared to historical averages.

“EBITDA multiples have risen from 12-13x to 15-16x, and price-to-value multiples from 2.5-3x to 3.5-4x,” says Sankhe.

Despite expensive valuations (60 to 100x), Amit Anwani, Research Analyst, Prabhudas Lilladher expects there to be good growth for the next two to three years.

Power is seeing significant growth and the government plans to add 50-55 gigawatts of thermal power over the next six to seven years, says Anwani,  while adding that this has increased hopes for conventional thermal players, including BHEL, which have received orders worth Rs 1 lakh crore in the past 15 months.

Transmission line companies and power equipment companies are also expected to benefit from the need for evacuation systems.

“The power sector is seeing a triple boost from thermal, wind, and renewable energy. Offshore wind power projects and increased wind installations are benefiting companies like Suzlon, with expected improvements in FY24,” he adds.

In solar, according to Anwani, the major benefit lies in evacuation systems rather than installation.

“Installation is happening at 80-90% capacity, but the main gains are from the evacuation systems. Companies like Apar Industries, ABB, Siemens (which supply power equipment), and switchgears and circuit breakers are seeing growth,” he says.

While near-term earnings growth is already priced in, there is potential for decent returns over the long term up to 2030, say analysts. However, short-term price appreciation may not match the growth seen in the last two years, they add.

Stocks to watch include PFC, REC, and IREDA, which could benefit from increased allocations and private investments.

Transmission companies and equipment manufacturers like smart metering and substation providers, such as Genus Power, Techno Electric, and ABB Signals, are also poised to gain. PSUs like NTPC and NHPC will also be in focus, going ahead.

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