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On the road to recovery

Power sector continued its resurgence in Q4FY21. Power demand witnessed spectacular recovery in H2FY21 (up 7.8% YoY) to close FY21 only 1.1% lower YoY, despite enduring the difficult H1FY21, when power demand declined 8.7% YoY. As a result, during FY21, while conventional generation was lower by 1.3% YoY (FY21 thermal PLF at 54.5% was ~500bps higher over H1FY21), renewable generation was up 3.7% YoY.

During Q4FY21, peak all-India demand touched an all-time high of 190.2GW and consistently ranged above 180GW due to which both volumes and prices at exchange increased. With coal PLF touching 67% in Q4FY21, Coal India’s Q4FY21 offtake increased 0.3% YoY to end FY21 at 574mnte, only 1.3% lower YoY. Demand, billing and collection normalised for many discoms, but may be disrupted in the near term again due to the worsening Covid situation. PFC/REC disbursed another ~Rs300bn in Q4FY21 helping normalise PSU companies’ receivables. NTPC, NHPC, CESC and PTC India are our top picks

Merchant volumes and prices increased during the quarter with IEX MCP averaging Rs3.55/kWh due to good demand, taking FY21 average MCP to Rs2.82/kWh (Rs2.48/kWh in H1FY21). International coal prices inched higher, impacting importers. PFC/REC scheme’s total disbursal reached Rs755.6bn, helping clear overdue and leading to normalising of receivables for most PSU power companies to FY20-end levels. Solar tariffs inched higher at Rs2.2/kWh due to increase in module prices after reaching record lows of Rs1.99/kWh in Dec’20. Barring an impact on the economy due to the ongoing second Covid wave, we expect power demand to witness strong growth in FY22, which will have a positive impact throughout the value chain. We also expect continuation of policy actions, ongoing capex and tendering activities in the sector.

Q4FY21E preview – key actionables:

* Maintain NTPC as one of our top picks: NTPC closed FY21 with excellent operational figures despite the challenges faced during H1FY21. NTPC group has added 3.4GW (net) commercial capacity during the year 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, which it plans to increase to ~40% in the next decade. Helped by disbursals through the Aatmanirbhar Bharat scheme for discoms, NTPC’s FY21-end receivables are estimated to have declined to 45-48 days (Rs120bn-Rs140bn).

NTPC’s transition towards an integrated energy company with focus on clean and green energy is taking shape with projects in several business areas, both large scale and pilots. For Q4FY21, NTPC’s PAT is estimated to increase by 6.1% YoY to Rs36.1bn due to 1) higher availability and generation on account of higher demand, 2) incremental earnings from new capacity commissioned in FY20/FY21, and, 3) lower fuel cost. Maintain BUY with a target price of Rs165/share.

* 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 an 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 cashflows are 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 Q3FY21, NHPC’s PAT is estimated to decline by 18% YoY at Rs3.1bn due to poor water flow at many plants and scheduled maintenance activities at few units.

* PTC India is an operational and divestment play: We expect PTC India’s Q4FY21E revenue to increase by 40.2% YoY on the back of >33% increase in volumes at 16,000MUs due to higher short-term volumes. On the back of higher revenue, Q4FY21E PAT is estimated to increase 7.5% 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 10.4% on FY23E basis

* CESC may re-rate on any positive commentary/actions: CESC’s Q4FY21E PAT is estimated to decline by 17.5% YoY due to lower EBITDA and lower other income as distribution businesses continue to recover from the severe impact of lockdown during H1FY21 and lower revenue from Noida Power. But 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. The company had announced interim dividend of Rs45/share, which translates into 47% payout at FY21E EPS of Rs95. At CMP, the dividend yield is 7.2%. If the payout ratio of 50% is maintained going forward, the dividend yield averages >7.5% over FY21E-FY23E.

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