Power Plus Sector Update - July witnessed strong ~10% generation growth - HDFC Securities

Mr. Anuj Upadhyay, Institutional Research Analyst, HDFC Securities

Generation increased 10% YoY in July'21, led by improved power demand (+11% YoY) from the revival in economic activity and low YoY base. Generation increased across all the segments (barring gas: -25% YoY), led by strong growth across the coal (+10% YoY) and renewables (RES) segments (+38% YoY). Accordingly, the plant load factor (PLF) improved for the coal, hydro, nuclear and RES segments, while it fell for the gas segment. Aug'21 also witnessed 15% YoY growth in demand and generation until 15th Aug 2021. Merchant rates also saw a spike in July'21 with the rise in power demand. 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, Tata Power and CESC.

Generation rises 10.1% in July'21: Power demand saw 11% YoY uptick in July'21, led by increased economic activity and low YoY base. Generation increased significantly across the coal/RES segments by +10.0%/38.5% YoY, while it declined across the gas segments by 25.3% YoY. Hydro/nuclear segment also saw 4.9%/5.3% YoY rise in generation. Overall, generation increased 10.1% YoY in July'21 and, even in Aug'21, it witnessed 15% YoY rise.

NTPC's generation was flat YoY: NTPC's generation increased 1.6% YoY to 24.1bn units in July'21. However, it fell significantly across the Tata Power stations by 28.8% YoY in the same month due to lower generation across the Mundra plant (on rising coal prices). Generation also improved for JSW Energy (5.7% YoY) and NHPC (5.2% YoY). Generation across SJVN and CESC was largely flat.

PLF and merchant rates improve on higher demand: PLF increased for coal/RES/hydro/nuclear-based plants by 438bps/493bps/182bps/357bps to 58%/24%/56%/71% in Jul'21. However, it declined by 622 bps YoY to 18.5% across the gas segment. Furthermore, both base and peak power deficits remained low at 0.3% and 0.2% respectively; however, merchant rates increased by 19.1% YoY to INR2.9/kWh in July'21 due to rise in power demand. For Aug'21 as well, merchant rates have been higher at INR3.8/kWh (+55.3% YoY).

Both coal dispatches and international coal prices increased YoY: Coal production/dispatches to power stations increased by 18%/42% YoY to 47.5 MT/49.9 MT in Jul'21, while they were up 9.5%/40% YoY to 187.0MT/189.6MT in YTDFY22, on a low FY21 base. International coal prices too skyrocketed to $127.1/MT (+139.2% YoY) as imports from China increased due to increased industrial activity and subdued monsoon.

Our view: While the overall demand/generation increased ~15% YoY each in YTDFY22, 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 INR3.03trn 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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