Power is a vital input for industrialisation and economic growth. For emerging markets like India with high growth potential, quality power in adequate quantity is crucial for achieving their economic and social targets. With an installed capacity of 230 GW, India’s power sector is the fifth largest in the world.
But our per capita consumption is only 770 kwh against the global average of 2,600 kwh and the European Union average of 6,200 kwh. It is clear, therefore, that the potential for growth is substantial. India needs to double its generation capacity over the next 10 years to meet this demand.
Coal-fired plants account for 57 per cent of our installed capacity while 19 per cent comes from hydro power. Renewable power and natural gas account for 12 per cent and 9 per cent, respectively. Excessive dependence on coal-fired plants is posing problems for the sector plagued by perennial coal shortages and policy constraints.
Even though impressive capacity has been installed during the past three years, much of the capacity is lying unutilised due to shortage of coal and pricing issues regarding imported coal. The power equipment manufacturing segment is constrained by slowdown in capacity addition and competition from international players. Revenues and profitability of the sector have been impacted by these constraints.
Now, some silver linings are emerging from the dark clouds, which have been hovering over the industry for quite some time. Power tariff hike in many states, bailout packages for SEBs, permission for imported coal price pass-through for PPP projects and CCI clearance of projects worth Rs 1 lakh crore are clear positives for the industry. Long-term investors can slowly start accumulating some promising stocks in the industry. Investors should consider balance sheet risks while looking to buy stocks, which may appear to be attractively valued.
Companies which face constraints relating to issues like dependence on imported coal (Adani Power), non-availability of gas due to issues relating to KG D6 basin and fixed power tariff etc (Reliance Power) are likely to find the going tough for some more time. Tata Power looks promising. NTPC with 35,000 mw capacity and massive capacity expansion plans is attractively priced now. PowerGrid also holds a lot of promise. With political stability after elections, reforms in the power sector are inevitable. Therefore, it would be realistic to be optimistic about the sector, going forward.
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