India : Improving demand-supply situation may lead to re-rating of power companies

Is India’s power sector, dogged by supply overhang and debt for long, finally showing early signs of revivalRs The demand-supply situation is improving with tapering capacity additions and accelerated retirements of old capacities. This also reflects in the improving plant load factor (PLF), or capacity utilisation in FY18, and a rebound in merchant tariffs. 

From their 2017 lows, of Rs 2.5 last July, tariffs have rebounded to Rs 3.7 per unit average price in June. Similarly, after seven years of decline, industry PLF improved by 100 basis points yearon-year to 51 per cent (excluding renewables) and by 100 basis points to 58 per cent in case of only thermal (coal and gas) power capacities. 

Gross conventional capacity additions are also drying up – down to only 6 GW in FY18 from 9 GW in FY17 and 23 GW in FY16. It peaked in FY13 at 24 GW. At the same time, retirement of old capacities is accelerating – from none in FY16 to 4 GW in FY17 and 4.1 GW in FY18 against estimated retirement of 1.5 GW in each of the last two years. While the incremental supply is tapering, demand is estimated to gradually inch higher in the coming years. Industry experts expect the demand growth to be at 6.3 per cent for the next three years, compared to 5.6 per cent in the last three years. 

This improving demand-supply situation would be a positive for the listed power companies such as JSW Energy, CESC, NTPC, Coal IndiaNSE -0.02 % and Power Grid. Unlike several other power utilities that are under stress due to high debt or lack of fuel availability, these companies are well placed with strong balance sheets and no fuel-related issues. 

Stocks of these companies are trading at multiyear low valuations – price-to-book multiples – and can see a re-rating if the positive trend continues for the next few quarters. 

Source :

Smart Grid Bulletin February 2019

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