Power sector companies are likely to report double digit growth in its profitability during the July-September quarter of the current fiscal (Q2 FY23), thanks to strong demand and higher power sales.  All-India power demand rose 5% year-on-year (YoY) during the quarter under review, while daily peak power demand averaged 185 Gigawatt (GW), up 4% from 178 GW in Q2FY22.

According to a report by ICICI Securities, higher generation and power sales are expected to boost September quarter earnings of the sector heavyweights such as NTPC, Power Grid Corporation of India, Coal India, Tata Power, and NHPC. The report highlighted that power generation was higher both for state-owned units and private players during Jul-Aug’22, resulting in potential higher power sales and higher revenues for discoms.

“We expect the strong growth in power demand and elevated international coal prices to sustain in near term, aiding offtake growth for Coal India (CIL), and boosting plant load factors (PLFs) of thermal plants of NTPC and others with domestic coal linkages. CIL, NTPC, PGCIL, NHPC, Tata Power and Genus Power remain our top picks,” the brokerage says in a report dated October 10.

The domestic brokerage expects state-owned NTPC’s profits to increase 10% YoY due to higher capacity and better PLFs. While Coal India, the country’s largest coal miner, is estimated to see its profit doubling to ₹5,900 crore, Power Grid Corporation of India (PGCIL) is projected to report 10% growth in consolidated profit after tax (PAT) for Q2 FY23.

In the private sector, Tata Power (TPWR) is expected to post adjusted PAT of around ₹680 crore, up 67% YoY. Among others, Genus Power (GPIL), the largest beneficiary of the ongoing ₹3 lakh crore, revamped distribution sector scheme of the central government, and is likely to clock 9.1% EBITDA margin in Q2 FY23, resulting in PAT of ₹8.4 crore versus ₹0.7 crore in Q1FY23.

Key recommendations and risks:

Coal India: ICICI Securities has maintained “BUY” rating on CIL with a target price of ₹294 per share valuing it on discounted cash flow (DCF) basis with peak production of 850mnte FY29E onwards. However, weakness in the power sector leading to lower volumes and fall in international coal prices remain key downside risks for the company.

NTPC:  The brokerage has also maintained a “BUY” rating on the stock with an unchanged SoTP-based target price of ₹196 a share. Delay in capitalisation of assets leading to lower capital efficiency and lower-than-expected utilisation due to weak demand resulting in lower incentive income remain key concerns for the power distribution company.

NHPC: The agency has affirmed “BUY” rating on the stock with a target price of ₹46 per share. It expects the company to maintain its dividend payouts as per the DIPAM guidelines, despite the planned capex (as free cashflow is expected to significantly increase once the 2,800MW capacity currently under construction becomes operational by FY24E).

PGCIL: The brokerage has upgraded PGCIL to “BUY” from “Add” due to the decline in stock price by 7% over the past 1 month, but maintain our DCF-based target price of ₹242 apiece.

Tata Power (TPWR): The agency has upgraded TPWR to BUY (from Add) due to the correction in the stock price (10% in the past 1 month), but maintain our target price of ₹262. Key downside risks for the stock are delay in deal closure and capital receipts from divestment and interruption in RE auctions and orders. The further rise in commodity price and higher-than-expected loss at Coastal Gujarat Power Ltd (CGPL) also remain key concerns for the company.

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