Power Plus Sector Update - Demand revives in June, post unlock - HDFC Securities

Mr. Anuj Upadhyay, Institutional Research Analyst, HDFC Securities

Generation increased 8% YoY in June'21, led by improved power demand from the revival in economic activity (given easing of intermittent lockdown) and heat wave across many states, which led to soaring temperatures. Generation increased significantly for the coal and renewables (RES) segments, while it declined for the gas and hydro segments. Accordingly, the plant load factor (PLF) improved for the coal and RES segments, while it fell for the gas and hydro segments. Merchant rates saw a spike in June'21 with the rise in demand for power. The outstanding dues status of discoms has improved significantly YoY but is up MoM due to higher power offtake. While the proposed reforms like the Draft Electricity Amendment Bill could act as the silver lining that revives the sector, their successful implementation remains a key trigger to watch out for. The top picks in our coverage universe are NTPC and CESC.

Generation rises 16.6% in Q1FY22: Power demand increased significantly in June'21, led by (1) increased economic activity due to relaxation in lockdown norms and (2) the rise in temperatures, given the delayed monsoon. Generation increased significantly across the coal/RES segments by +12.3%/21.4% YoY, while it declined across the gas/hydro segments by -32.1%/-6.0% YoY. Overall, generation increased 8% YoY in June'21 and 16.6% in Q1FY22.

NTPC's generation up 8.9% YoY: NTPC's generation increased 8.9%/19.8% YoY to 22.3bn/72.0bn units in Jun'21/Q1FY22. However, it fell significantly across the Tata Power stations by 40.1%/35.4% YoY in Jun'21/ Q1FY22 due to lower (YoY) generation across the Mundra plant (on rising coal prices). Generation also improved for JSW Energy (5.4% YoY) and CESC (14.7 YoY), while it declined for NHPC (-10.8% YoY) and SJVN (-13.0% YoY) in Q1FY22 due to low water levels.

PLF improves and spot rates up on improved demand: PLF increased for coal-based plants (+496bps YoY to 54%) and RES segment (+223bps YoY to 22%) but fell for hydro (-357bps YoY to 47%) and gas (-888bps YoY to 19%) segments in Jun'21. Furthermore, both base and peak power deficits remained low at 0.2% and 0.1% respectively; however, merchant rates increased by 30.5% YoY to INR3.1/kWh in June'21 due to rise in power demand. For Q1FY22 as well, merchant rates increased 31% YoY to an average of INR3.2/unit.

Both coal dispatches and international coal prices increased YoY: Coal production/dispatches to power stations increased by 6.6%/33.6% YoY to 45.3 MT/44.4 MT in Jun'21, while they were up 7%/39.4% YoY to 139.6MT/139.7MT in Q1FY22, on a low Q1FY21 base. International coal prices too skyrocketed to $111.4/MT (+101% YoY) as imports from China increased due to increased industrial activity and subdued monsoon.

Our view: While the overall demand/generation increased 21.5%/16.6% YoY in Q1FY22, we expect power demand to post a 12% rise in FY22, led by improved economic activity in the country. The central government's liquidity package under the Atmanirbhar scheme has significantly improved liquidity for discoms. Furthermore, with CCEA approving the INR3.03tn reform-linked package, we can expect improved infrastructure Capex by discoms over the next 3-4 years. This would, in our view, lower AT&C losses, nullify the ACS-ARR gap, and promote private participation in the discom space. Funds under the scheme would be released in proportion to the discoms' achievements against mutually agreed targets in the action plan. The above-mentioned reforms could turn the sector around (if executed successfully) and enable sub-sectors like gencos, transcos, and discoms to improve their operational efficiencies and become self-sufficient.

Source : Equity Bulls

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