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Resilience benefits the sector

Despite the two-month (May-Jun’21) lockdown due to covid second wave, power sector was resilient and fared well in Q1FY22. Although due to lower base in Q1FY21, power demand was up 17% YoY, it was 2.5% lower vs Q1FY20 due to the lockdown impact. However, once the states started to relax lockdowns and allowed economic activities to normalise, there was a significant jump in demand, which crossed its alltime highs several times Jun’21-end onwards.

Peak all-India demand reached an alltime high of 200.6GW on 7th Jul’21. Due to significant growth in demand, both volumes and prices at exchange increased. Coal PLF averaged 58% in Q1FY22 leading to 33% YoY increase in CIL’s Q1FY21 offtake at 160mnte. Higher power demand and all-time high international coal prices will continue to aid offtake growth for CIL. Demand, billing and collection were slightly affected due to the lockdown, but learnings from the past year helped discoms. NTPC, NHPC, CESC and PTC India remain our top picks.

Merchant volumes and prices in Q1FY22 were higher YoY with IEX MCP averaging Rs3.2/kWh (Rs2.44/kWh in Q1FY21) and MCV up 7% YoY. International coal prices inched up further (up by an average 19% QoQ at >US$115/te), impacting importers. Power demand, after touching its all-time high tapered down to 180-185GW levels due to the progression of monsoons across the country.

RE tendering witnessed minimal activity in Q1FY22 due to the lockdown, with only a few states issuing tenders. As per Mercom, solar tenders by government agencies declined 19% QoQ at 8.5GW in Q1FY22. However, we expect auction activities to expedite since demand is huge, as witnessed in response to SECI’s recent tender for setting up 1,785MW of solar projects in Rajasthan (tranche-IV), which was oversubscribed by 9.3GW. We also expect continuation of policy actions, ongoing capex and tendering activities in the sector.

Q1FY22E preview – key actionables:

* Maintain NTPC as one of our top picks:

In FY21, NTPC group commercialised 3.4GW (net) to reach 64.5GW, while standalone commercial capacity reached 51.7GW. Non-fossil fuel capacity addition of 904MW (RE + hydro) helped its pie to increase by 100bps YoY to 7.8% of total installed capacity. NTPC has revised its RE capacity addition target to 60GW by FY32, with details likely in the upcoming earnings call. The group has >20GW capacity under construction, including 5GW RE. In Q1FY22, NTPC group’s generation increased 26% to 85.8BUs in Q1FY22. We expect NTPC’s PAT to increase by 6.9% YoY to Rs36.1bn due to 1) higher availability and generation on account of higher demand, 2) incremental earnings from new capacity commissioned in FY21, 3) lower fuel cost and 4) lower base of Q1FY21. Maintain BUY with a target price of Rs165/share.

* CESC may re-rate on any positive commentary/actions; valuations much lower than peers:

CESC’s Q1FY22E PAT is estimated to increase by 24.7% YoY to Rs2.5bn due to base effect and also as distribution businesses were not impacted as much by the lockdown, resulting in higher generation and sales YoY. Interest expense is estimated to decline further due to debt repayment/prepayment. We believe CESC is amongst the most undervalued stocks in the midcap power space and hence, can re-rate on any positive commentary on growth / approval of pending tariff order in Kolkata. On FY23E basis, compared with Torrent Power and JSW Energy’s P/E of 15.8x / 29.1x and P/B of 1.9x / 1.8x, CESC remains much behind at FY23E P/E of 7.4x and P/BV of 1x. The company’s FCF yield is 12% and dividend yield is 6.5%. Maintain BUY with TP of Rs1,131/sh.

* NHPC has good potential:

NHPC’s increase in standalone capacity from 5,551MW to 8,351MW in FY24E takes its regulated equity to Rs221bn in FY24E, at a CAGR of 14.5%, resulting in earnings CAGR of 11%. NHPC is the largest ‘completely green’ power generating company in India. We believe it will be able to maintain its dividend payouts as per the DIPAM guidelines, despite the planned capex (as free cashflow is expected to significantly increase once the 2,800MW under construction capacity operationalises by FY24E). We maintain our BUY rating on the stock with a target price of Rs34. In Q1FY22, NHPC’s PAT is estimated to increase by 3.7% YoY to Rs7.5bn despite poor water flow at many plants reducing generation by 11% YoY. However, in Q1FY21, base was lower due to rebate provided on fixed charges (Rs1.85bn).

* PTC India is an operational and divestment play:

We expect PTC India’s Q1FY22E revenue to increase by 57.6% YoY on the back of 26% increase in volumes at 23,800MUs due to higher short-term volumes. On the back of higher revenue, Q1FY22E PAT is estimated to increase 24% YoY. We believe the company’s dilution of stake in its non-core holdings will result in value unlocking and lead to meaningful upward rerating of the stock price. The company had also announced a dividend policy in FY20, wherein it stated its intent to pay out at least 50% of the annual profit. At CMP, the dividend yield is 7.4% on FY23E basis.

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