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Power demand – tide may turn with lockdown easing

Although power demand growth was robust in Apr’21, the month of May’21 has faced the brunt of demand decline although not as severe as in Q1FY21. Yet, on YTD basis (till 23rd May’21), all-India daily/peak demand was higher by an average of 28%/26% YoY (daily YTD demand is higher even vs FY20), while for May’21-TD it is up 12%/10% YoY.

Thermal PLFs continued to be strong at 67% in Apr’20 due to which, Coal India’s offtake increased to 94.7mnte (vs 79mnte for 2MFY21 and 104.5mnte for 2MFY20). Even though solar generation growth has been strong due to capacity addition, wind generation continues to be erratic. Easing of lockdowns from Jun’21 onwards may reverse the decline in power demand. Further, ~9GW capacity auction expected over the next two months will help kickstart the RE auction space again. NTPC, NHPC, CESC, and PTC India remain our top picks.

* Tide may turn for power demand from Jun’21 onwards:

On YoY basis, all-India daily/peak demand was higher by an average of 28%/26% YoY during FY22-TD and higher by 12%/10% YoY for May’21-TD (till 23rd May). However, comparing with FY20 figures, all-India daily/peak demand is an average 0.6% higher/ 0.7% lower YoY during FY22-TD and lower by 8%/9% YoY for May’21-TD (till 23rd May). May’21 has been hit hard due to the covid-related lockdown in most states, in particularly commercial demand. However, industrial and residential demand have supported the higher YoY figures. With covid cases reducing by more than 50%, the second wave is on decline. If the restrictions are relaxed from Jun’21 onwards, power demand is likely to witness an uptick again.

* Covid-induced lockdown shaved 20GW off daily demand:

Peak power demand has declined from 185GW during Feb/Mar’21 to 155GW-160GW currently, while average daily demand is now 140GW-145GW vs ~160GW in Feb/Mar’21. The decline can be attributed to disruptions due to regional lockdowns as well as the impact of cyclones in both Western and Eastern India.

* Renewable generation growth is still far from anticipated levels; coal holds fort:

During FY21, renewable generation gained 60bps in the overall generation mix to reach 10.6%, led by higher solar capacity. 6GW of solar capacity has been added since Mar’20, but much more is required in order to reach the lofty targets set by the GoI. ~9GW capacity auction expected over the next 2-3 months will help provide the necessary thrust to the slowed-down RE auction space. Coal continues to be the main energy source comprising 68.8% of the overall generation mix. Improved domestic coal availability at attractive rates has lowered dependence on imported coal and resulted in higher coal PLFs.

* Higher coal PLFs help improve Coal India’s offtake:

Till 23rd May'21 on MTD basis, production was 30.8mnte (up 1% YoY) and offtake was 40.8mnte (up 41% YoY). At this rate, we expect offtake for May’21 to reach 55mnte. Till 23rd May'21, on YTD basis, production was 72.6mnte (vs 81.8mnte for 2MFY21 & 91.9mnte for 2MFY20) and offtake was 94.7mnte (vs 79mnte for 2MFY21 & 104.5mnte for 2MFY20). At current rate, YTD offtake has surpassed FY20 levels as well, although production is lower.

Both e-auction premiums and volumes continue to be higher YoY. For Apr’21, total e-auction volumes were 15.1mnte (up 66% YoY & 110% 2Y YoY) and premiums averaged 14% (vs 5% in Apr'20 & 45% in Apr'19). Decline in production by Coal India has been deliberate in order to reduce coal pithead stock, which reached 99mnte at FY21-end. This strategy has been successful as stocks have reduced to 77.2mnte currently. Further, coal inventory at power plants continues to be low at 15 days and coal PLFs remain at elevated levels due to which coal offtake will continue to be firm.

We remain positive on CPSUs as their earnings are based on capacity creation and not utilisation, and they continue to trade at low valuations and high dividend yields. Dividend payout for most PSUs for FY21 will be at least as per the policy set by GoI (higher of 5% of net worth, or 30% of net profits), despite buyback announcement by companies such as NTPC. Top picks: NTPC, NHPC, CESC, and PTC India.

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