Capex To Keep Regulated Power Utilities Earnings Resilient In 2024, Say Brokerages

Regulated power utilities will continue to remain resilient in as capex-driven earnings improve in the medium term due to the restart of new thermal capacity addition, according to Citi Research.

The research firm expect to witness increased frequency of peak power deficit in 2024 leading to continuing expansion in capex opportunity for regulated utilities.

The increasing adoption of renewables in India too would add to this opportunity, leading to elongate growth runway over the long term, it said in a Jan. 2 note.

"Power demand in India is likely to grow at a 4.5–5.5% underlying CAGR. Two key themes driving the sector over the medium term will be the increasing chance of peak power deficits and the sustenance of recent improvements seen in Discom AT&C losses and pay," Citi said.

Citi expects potential news flow on peak power deficits to also lead to sustenance of rerating.

"Other sectoral reforms like resolution of DISCOM payment delays and reduction in AT&C losses also bode well for trading multiples of regulated utilities," it said.

NTPC and Power Grid Corp. of India remain Citi's top picks.

Renewables Thrust To Continue

The government's thrust on renewables would continue so as to achieve net zero emissions by 2070 and 500 GW of renewable capacity by 2030.

Citi Research expects India to add 14–16 GW of solar capacity per year.

The government is also encouraging domestic solar cell and module manufacturing by providing production-linked incentives.

Domestic manufacturing has also seen a pickup, with multiple companies announcing capex, in part aided by government incentives. Given the growth expected in renewables and their inherent intermittent nature, the role of energy storage systems will increasingly become pivotal.

Valuations Have Run Up, But Regulated Utilities Still At Comfortable Levels

Regulated utilities have outperformed Sensex. Due to re-rating, valuations are not as attractive as earlier, but are still reasonable in relative terms, Citi Research said.

Power Demand Continued To Show Growth

Power demand continued to show year-on-year growth, albeit at a slower pace in November; growth flattened in December. In November, demand grew 9% year-on-year, mellowing a little after showing three months of strong 20% year-on-year growth in August–October 2023, according to HSBC Global Research.

Coal stocks staged a comeback at power plants, supported by lower demand and increased production in the post-monsoon period. Still, year-to-date, power demand has grown 9% year-on-year. Amongst the states, the southern states of Karnataka, Telangana and Andhra Pradesh exhibited the highest growth, closely followed by Maharashtra and Gujarat despite their size, HSBC Global said in Jan. 2 note.