These power stocks can electrify your portfolio, check them out

Stocks of power companies are on a tear with the BSE Power Index rallying almost 18% in a month compared to benchmark index Sensex jumping by just 5%. The BSE Power is also trading at 52-week high of 2,823. Let’s understand what the reason for this outperformance.

India’s power consumption is expected to increase at more than 5% per year over the next decade given expected GDP growth of over 5% and low per capita electricity consumption at just 30% of the global average, ~40% of that in Vietnam and 20% of that in China.

BOBCAPS expects over FY21-FY30, steady growth in electricity consumption alongside stronger capex discipline, distribution sector reform, sustained growth in renewable energy generation, and rising private sector participation in the transmission space are the key levers for the sector going forward.

Rs 6 lakh crore opportunity

Privatisation of power distribution in India started off well with Delhi & Mumbai but has slowed over the past decade. the process will receive an impetus if the stringent regulations proposed under the Electricity (Amendment) Bill 2020 are implemented.

“The Electricity (Amendment) Bill 2020 expected to be enacted in FY22, the  private sector could see the opening up of a potential Rs 6tn opportunity – ~40%  of the total income of the Indian banking sector and 1.5x India’s FMCG market,” said BOBCAPS in a note.

The main focus over the next few quarters will be on bidding rounds for privatisation of distribution in the union territories of Chandigarh followed by Puducherry, Jammu & Kashmir, Ladakh, Lakshadweep and Andaman & Nicobar.

Here are top picks from the sector shortlisted by BOBCAPS:

Tata Power | Target price: 131 | Upside: 28%

Tata Power will derive >80% of forecast FY22 EBITDA and 55% of valuations from fast-growing segments such as power distribution (top player), renewable generation (among top 10), solar EPC (top player) and rooftop solar solutions (top player).

The company has made good progress on debt reduction in FY21 and we believe deleveraging will continue in FY22 as fresh investments flow into the renewables business. These investments are also likely to come in at a significant premium to Tata Power’s current valuation, given the higher value ascribed to listed pure-play Indian renewable peers. We expect deleveraging and EBITDA growth to spur an FY21-FY23 EPS CAGR of 49%, even as merger of the lossmaking CGPL plant into the parent is likely to save taxes.

Power Grid | Target price: Rs 261 | Upside: 14%

Power Grid owns 40% of India’s transmission assets – the lowest-risk segment in the power sector due to a secure payments system and high dependence of discoms and generators on the transmission network. Private sector participation in transmission may increase but inherent entry barriers are likely to keep competition in check.

Further, a majority of the company’s assets will remain under the protected cost-plus-regulated return model. Valuations are also attractive at 7.2x FY22E EV/EBITDA.

Torrent Power | Target price: 461 | Upside: 8%

Torrent Power’s two decades of experience in distribution puts the company in a good position to win more circles as the power distribution sector opens up.

The stock is trading at a 70% premium to its 10-year mean forward EV/EBITDA and at 30% premium to its 10-year mean forward P/BV. TPW posted a stable stock performance over FY15-FY20 but rallied sharply in FY21 largely due to new renewable order wins and its recent winning bids for Dadra & Nagar Haveli and Daman & Diu.

CESC | Target price: 721 | Upside: 7%

CESC has decades of power distribution experience in Kolkata and Greater Noida, besides running a franchisee model.

At 5.7x FY22E EV/EBITDA, CESC is trading at a 17% discount to 10-year mean valuation multiples. In our view, this underperformance is largely due to a lack of major growth initiatives undertaken by the company. Prospects will improve only if India’s distribution segment is opened up rapidly, affording CESC the opportunity to win new concessions. Without new wins, CESC will find it increasingly difficult to compete against larger peers.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing)