Adani Green, NTPC, Power Grid, IEX: Are power stock investors Abhimanyu of Mahabharat?

Bernstein in its latest strategy note said the Indian power sector has been firing all cylinders but it is a cycle and would come to an end at some point. It recalled the story of Abhimanyu in epic Mahabharat, where the son Arjuna knew how to enter the ‘Chakravyuh’ but did not know how to get out of it.

"None of us want to be the Abhimanyu of this story," the brokerage said on power sector, while taking a look at the last cycle to understand what led to the demise and which industry indicators one should keep an eye out for. For now, it remains positive on the power sector and believes it’s an early cycle.

Bernstein said the high frequency indicator of the downfall is merchant power prices. They hit a peak of Rs 8.4 /kWh in April 2009 and subsequently started to slide and the whole sector went down with them - utilities, equipment and financiers.

Bernstein sees much less risk of DISCOM health deterioration, over-supply in non-solar hours, coal availability challenge and grid constraints. The biggest risk in the current cycle, it said, could be either demand slowdown against the expected growth of 0.8-1 time of GDP growth and battery economics, if Sodium ion for example becomes commercially successful.

Hence, the foreign brokerage thinks the risks of failure in the current cycle seem much less than the last one but Bernstein said it would will keep an eye out for demand, battery economics and merchant power prices- to wait for a sign to run for the hills.

As of now, it remain positive (but selective) on the sector. It continue to like shares of NTPC and  Power Grid. For NTPC, it has a target price of Rs 340 and Power Grid Rs 315. Bernstein has a target of Rs 110 on IEX and Rs 500 on Adani Green Energy Ltd. Net-net, it has 'Outperform' on NTPC, Power Grid and is 'Underweight' on IEX and Adani Green Energy.

"What led to the downfall last time: Put simply it was the first phase of privatisation of this industry- where surrounded by government agencies on all sides (coal, transmission, DISCOM), influenced by political objectives and funded by easy money from banks/ NBFCs (which had never seen a slide)- the sector went down the drain," Bernstein noted.

To recall, the power sector was de-licensed in 2003, the first big private plant by JSPL came in 2008 and made 200 per cent return on equity (ROE).

"We had 17 per cent power shortage back then. There was also the Reliance Power IPO, getting subscribed 73 times in January 2008. Everyone jumped in, process was simple-Sign MoU with state, get land showing MoU, use MoU to get loan, give EPC contract, start construction, wait for coal and plan to sell on merchant (prices later crashed), Bernstein said.

It said there were demand side woes with power Growth less than that of GDP growth. FY10 and FY11 saw an average power demand growth of 5 per cent against GDP growth 9 per cent, driven by slower industrial activity.

Additional captive generation capacity came online diminishing the need for grid power, it noted.

Besides, it pointed out the DISCOM disaster. "If you think DISCOM health is bad today, in the last cycle DISCOM under-recovery rose to 21 per cent of cost of supply in FY12 (vs 2 per cent in FY22). Their health was so bad they preferred load-shedding rather than buying power, even if it was available," it said.

Supply side woes included coal scarcity, with coal production growth rising mere 4 per cent CAGR from FY07-17 when coal generation capacity grew 10 per cent in the same period, driving companies to import coal/ back-down plants.

 

"Imported coal prices had risen 100 per cent from May 2009 to January 2011. There was oversupply as well. India had 90 GW of under-construction thermal plants on an installed base of 102 GW in FY10. Dispatchable power supply grew at a CAGR of 11 per cent between FY09 and FY16 against power demand growth of 5 per cent in the same period, Bernstein said.