Indian Power Sector: Growth Opportunities Ahead But Execution Delays Pose Risks, Says JPMorgan

India’s power sector is experiencing significant growth, driven by rising electricity demand, urbanisation, and industrial development. JPMorgan expects the growth in the sector to continue with a 5-6% CAGR over the next decade, amid substantial opportunities in thermal power and transmission infrastructure.

Companies like NTPC Ltd. and Power Grid Corp. of India stand to benefit from this growth, supported by rising demand for coal-based generation and transmission expansion, the brokerage said in a note.

However, despite these opportunities, JPMorgan cautions that execution challenges remain a major concern. The power sector in India has historically struggled with delays in project implementation, regulatory interventions, and issues surrounding the signing of renewable power purchase agreements. These challenges are expected to persist, potentially undermining the execution of key projects.

Power demand has surged by 9.6% and 7.6% year-on-year in fiscal 2023 and financial year 2024, respectively, it said. This surge has caused a sharp re-rating of stock valuations in the sector.

But the recent correction in valuations has reduced some market "froth". Private independent power producers and utilities, such as Tata Power Co., JSW Energy Ltd., and Torrent Power Ltd., still face relatively high valuations, leaving little room for error if projects face delays or setbacks, JPMorgan said.

The Indian power market is also grappling with a much tighter demand-supply balance, especially during peak demand periods. This is partly due to structural growth in electricity demand, which is expected to continue rising in the long term, according to the brokerage.

One of the sector’s ongoing challenges is the weak financial health of distribution companies, which continue to struggle with high losses. In financial year 2023, distribution companies' losses stood at Rs 2.3 lakh crore, and despite reforms and privatisation efforts, debt remains high in such firms.

The government’s Revamped Distribution Sector Scheme has made some progress, but further reforms are needed to address these deep-rooted financial issues, the brokerage added.

On the positive side, the transmission and distribution capex is growing rapidly, and the renewable energy sector continues to see favourable economics, driving long-term growth. Fuel supply conditions have also improved, with healthy coal inventories easing supply concerns.

JPMorgan has initiated 'overweight' ratings for NTPC with a target price of Rs 417 and Power Grid with a target price of Rs 316, citing their strong regulated business models and growth potential in thermal and transmission infrastructure.

For private utilities, however, JPMorgan adopts a more cautious approach. It initiated coverage on Tata Power and Torrent Power with a 'neutral' rating and a target price of Rs 378 and Rs 1,504, respectively. It has an 'underweight' rating on JSW Energy with a target price of Rs 500. These companies, while benefiting from demand growth and have high valuations that may leave little room for execution failures, it said.