Power - Outlook 2021: Covering lost ground - ICICI Securities

CY20 was an eventful year for power sector, which made a better-than-expected comeback in the second half after the difficulties faced during Q1FY21 due to the outbreak of Covid-19 pandemic. But we expect CY21 to be an operationally and financially stronger year for the entire sector, with many pending/on-going concerns likely to be addressed soon. CY21 is also expected to be a highly eventful year, particularly on the generation and distribution front, while transmission space may spring a surprise with few large-sized opportunities. Renewables are set to take a leap on several fronts - capacity, generation, manufacturing, rooftop, pumps among several others - but conventional will continue to hold strong. Expect innovative tendering, policies and financing to become a norm rather than an exception.

Top picks: NTPC (TP: Rs165/sh), Coal India (TP: Rs240/sh), CESC (TP: Rs851/sh)

- NTPC - Strong operational performance; capacity addition on track; 16% expected earnings growth over FY20-22E with 6-7% dividend yield; valuations attractive

- Coal India - Higher volumes; cost-control measures underway; receivables to decline; FY22E dividend yield at 14.8%.

- CESC - One of the most undervalued midcap power stocks; can rerate on any positive commentary/actions on better capital allocation; good operational recovery

Key things to watch in CY21:

- Capacity addition - RE, particularly solar, will gather a significant pace. Wind capacity addition will restart. Thermal addition is also expected to continue led by NTPC.

- Large RE parks (UMREPP) may be the new route to achieve capacity targets of 175GW RE by CY22-end and 300GW solar by CY30. Solar tariffs are expected in the range of Rs2-2.5/unit.

- Demand recovery looks strong and demand growth sustainable. Expect power demand to maintain its positive trajectory and end FY21 with 5-6% growth YoY.

- Domestic coal production will increase, helped by higher coal PLFs and e-auctions, which will consequently reduce dependency on imports.

- Transmission may witness a fillip with opportunities related to upcoming RE capacities, ISTS tenders and strategically important projects

- Merchant power prices may average higher at Rs2.5-3/unit as demand improves

- Solar module manufacturing will be promoted and further incentivised through policies and schemes. Around Rs45bn PLI scheme will help.

- Stressed asset resolution to restart.

- Electricity (amendment) Act and National Tariff Policy is expected to come up

- More discoms will be up for privatisation. Three discoms in Odisha have already been privatised and many other states and UTs are in the pipeline including MP, Jharkhand, Rajasthan, UP, Chandigarh, Puducherry.

- Smart metering to gain significant momentum

- Ambitious KUSUM scheme will start delivering and have a big impact. Scheme targets more than 30GW solar installation for agricultural sector through three components. Ultimate aim is to solarise agricultural feeders. No financial burden on farmers and opportunity to increase farmer income, reduce losses, reduce state subsidies and cross subsidies among other benefits.

- SECI to get more innovative with tendering including flexi RE contracts with focus on 24x7 RE supply, pure storage capacity tenders, revival of wind power and solarising agricultural grids.

- Further liquidity infusion through PFC/REC scheme will help ease systemic stress. Nearly Rs1.14trn has already been sanctioned; expect disbursements to the tune of Rs200bn in next one month

- Focus on improving on ESG front will continue for all companies in the sector

Source : Equity Bulls

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