Mr. Anuj Upadhyay, Institutional Research Analyst, HDFC Securities
While the demand for power had been impacted by the pandemic in 1HFY21, its revival has been far exceeded everyone's expectation. H2FY21 saw 7.5% yoy growth in both demand and generation, which curbed the FY21 decline in power demand to only 1%. We expect FY22 to witness 12% yoy growth in demand and generation, led by recovery across the economic activities and low FY21 base. However, the pandemic has further aggravated the ailing financial status of the discoms, resulting in a steep rise in discom dues towards the gencos (scaling a new peak of INR1.4tn in Jan'21) and eventually a sharp rise in its borrowings. While the proposed reform measures like the Draft Electricity Amendment Bill will act as a silver lining towards reviving the sector, its successful implementation remains a key trigger to watch out for. We initiate coverage on the sector with the hope that a revival would take place, given these reforms could improve the discoms efficiencies and financials. We initiate our positive stance on NTPC, PGCIL, CESC, Tata Power, Torrent Power and NHPC, based on their risk averse regulatory business models, growth opportunities, healthy balance sheets and attractive valuations (~0.7x FY23 BV).
Power demand expected to increase 12% yoy in FY22: With power demand having attained a new peak during Jan-March 2021, we expect it to witness a steep 12.1% yoy rise in FY22, led by revival in economic activities and low FY21 base. However, the fall in demand from the high-tariff-paying commercial and industrial (C&I) segment during the lockdown is expected to escalate the Average Cost of Supply (ACS) and Average Revenue Realisation (ARR) gap to INR0.69/unit in FY21. Nevertheless, with the revival in demand in FY22E, the gap is expected to normalise to INR0.50/unit. This should bring down the discoms' under-recoveries in FY22 to ~INR709bn vs INR871bn expected in FY21.
Under-recoveries, rising dues to escalate discoms' debt to INR6tn: Rise in under-recoveries are expected to be funded through fresh debt in the form of Atmanirbhar scheme and working capital loans. While normalcy in expected from FY22 onwards in terms of better power demand, higher collection efficiency and tariff hikes by discoms; its' debt is still expected to attain a new high of INR6.1tn in FY22, led by under-recoveries (FY21 - INR871bn and FY22 - INR709bn).
Renewable energy will dominate capacity addition growth, going ahead: Assuming normalcy in economic activity from FY22 onwards, we expect that the average annual peak power demand would increase from 174GW in FY20 to 219GW in FY25E (CAGR of 4.7%) and beyond that, at 4.5% CAGR. In order to meet this demand growth, we expect India's installed capacity to increase by 97GW from current 370GW in FY20 to 467GW in FY24E. The growth would be led by the RES, which is expected to add 63GW of capacity (65% of the total incremental capacity addition). Coal would add 26GW of capacity over the next five years.
Reforms success depends on its proper execution: In order to provide the much-needed support to the power sector, the power ministry has announced a series of measures and reforms, including major ones like (a) the fourth draft Electricity Amendment Act - which primarily focusses on delicensing of distribution segment; (b) INR3.1tn budgetary support for improving distribution infrastructure; and (c) reform linked distribution scheme. However, these measures would lead to a turnaround in the sector only if executed successfully, which would enable sub-sectors like gencos, transcos and, more importantly, the discoms to become self-sufficient and improve their operational efficiencies.