Suzlon, BHEL, Adani Power, Tata Power, Adani Energy, Waaree shares: Targets, Q2 preview

JM Financial sees interest rate headwinds for the power sector amid what it called a capex super-cycle. In a note on Wednesday, the brokerage said recent corrections and evolving sector dynamics had shaped its preferences across the sector.

It reiterated 'Buy' on Adani Energy Solutions Ltd for platform optionality and Adani Power Ltd for its best financial profile. It also retained 'Buy' on Juniper Green Energy Ltd and CESC Ltd for valuation comfort, and JSW Energy following the recent correction.

Among power equipment makers, JM Financial reiterated 'Buy' on Emmvee Photovoltaic Power Ltd for valuation comfort, Suzlon Energy Ltd despite concerns over growth from FY28 onwards, Premier Energies Ltd for its long growth runway despite margin pressure risks, and BHEL Ltd for its strong order book and improving earnings visibility. It also retained 'Buy' on NTPC Ltd for valuation comfort despite poor near-term growth visibility, Tata Power Company Ltd for valuation comfort despite exhausted growth levers and lagging renewable energy execution, and Clean Max for reasonable valuations. Overall, the brokerage suggested up to 37 per cent upside for its coverage stocks. 

The brokerage suggested 'Add' on Waaree Energies Ltd and Inox Wind Ltd. It also upgraded its ratings on Power Grid, Torrent Power Ltd, SJVN Ltd and NHPC Ltd, while retaining 'Buy' on Power Grid Corporation of India Ltd among utilities.

"Power demand in India continues to outstrip all projections. Merchant power prices, fuel shortages and outages testify to the emergence of a structural deficit after more than a decade. No surprise, all major utilities are on a major expansion drive across the power value chain. By one estimate, total generation asset base of utilities would grow by more than 50 epr cent by 2030E, involving capex of Rs 12 lakh crore, bumping up debt exposure by Rs 4 lakh crore," JM Financial said.

Given favourable sector tailwinds, now juxtaposed with the risk of a rate cycle, JM Financial believes companies with high leverage, large upcoming capex and merchant tariff exposure are most vulnerable. Conversely, utilities with operational assets, regulated returns, strong balance sheets and access to low-cost financing are relatively better off, the domestic brokerage said. 

"Rising interest rates have a disproportionately negative impact on power utilities given their large capex needs, particularly in case of RE developers. Unlike conventional generation, RE projects entail humongous upfront capex while most of the cash flows are generated over a long operating life. We estimate financing costs for utility-scale RE projects in India could constitute about half or more of LCoE (levelized cost of electricity)," JM said.

The brokerage said equity Internal Rate of Return (IRR) for solar and wind projects declines by 400 bps and 300 bps on every 100bps increase in interest rate; alongside their equity valuation erodes by 10–12 per cent and 17–21 per cent, respectively.

"That said, for utilities with operational projects and fixed tariffs, the impact is relatively benign because OCF is largely insulated from interest-rate movements. Meanwhile, companies undertaking aggressive capacity expansion cannot escape the pinch given their borrowing costs rise, eating into returns on incremental projects. Other knock-on effects are potentially higher tariff requirements, more conservative bidding, slower project awards and delayed capex," JM Financial said.