With rising economic activity the demand for power has been robust while supply has been lagging. Analysts at Bank of America Securities (BofA) believe power shortage in the peak season will persist as the supply-demand mismatch on slower thermal capacity addition in the past few years continues and demand remains robust. BofA analysts, however, see positives for select sectors and stocks even as the power supply remains tight. Analysts noted that financials such as State Bank of India, ICICI Bank and others such as NTPC and BHEL could benefit over the next few years as this demand-supply mismatch is bridged.
Supply-demand mismatch
Analysts noted that the same is being attempted to be bridged. “Government is trying to bridge the gap through the resolution of stressed capacity and addition of new capacity,” BofA said. Analysts said that 62 Gigawatt (GW) of thermal capacity was historically stressed, and in FY18 the government identified 34 stressed coal projects with debt of Rs 1.7 trillion for resolution. “Of this, till now 12 projects (13GW, debt Rs 592bn) are resolved through coal linkages/PPAs, while 5 projects (6.3GW, debt Rs 351bn) resolved through asset sale, with 44% recovery for lenders,” BofA said.
Stocks that may benefit
Currently, 7 projects are under NCLT, while 10 projects are likely to be liquidated completely. “With power sector NPAs for key financials at Rs 503 billion, any further resolution of stressed projects will be positive for State Bank of India, Bank of Baroda, ICICI Bank, and Axis Bank which have large exposure to the sector,” said analysts. Further, to curtail the mismatch in supply-demand now the government plans to add 27GW of thermal capacity by FY26. “We believe this capacity addition will augur well for NTPC as it will increase the potential for future Capex/capitalization and expansion of regulated equity,” they said.
Other stocks that could benefit also include Bharat Heavy Electricals Limited. “Although we remain structurally bearish on the stock, for next 1-2 years we could see bounces in the stock if these order wins get reflected in the results,” BofA said. Adding to this, coal demand will also increase. “With domestic Coal supply expected to add only incremental 80-90 MT, we could see intermittent coal shortages in the peak months as supply is likely to remain tight. We see Coal India and NTPC (commercial coal mining) as key beneficiaries on higher realizations in these months from rising prices as the spot prices (e-auction) move up,” they added.
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