Ever wondered about how the power sector in our country works? And what are the opportunities that lie in the industry? For the first time since the liberalization policy in 1991, India’s power sector is going to change for good, in a way that could benefit both consumers as well as power companies. The Finance Ministry is pushing for privatization and delicensing of the power sector which could change the way the power sector works in India.
The total installed capacity of power stations in India stood at 373.43 GW as of October 2020. The transmission lines in India are 4,98,651 km long. According to India Brand Equity Foundation (IBEF), between 2000 and 2020, the power sector attracted Rs 1.11 Lakh Crores in Foreign Direct Investment (FDI), which is close to 3% of the total Foreign Direct Investment(FDI) inflow in India.
Currently, the power distribution companies(Discoms), transmission companies(Transcos), and generation companies(Gencos) are distressed financially due to reduced electricity demand along with unfair pricing and power policy.
With the Budget 2021 and the Electricity Amendment Bill 2020, the power sector is in for a revolution. If the bill is passed in the parliament, it could change the face of the industry. In this piece, we explore how the power sector fairs in the stock market and the listed power companies that have a potentially good investment perspective.
The Companies in the Sector
With a market cap of Rs 96,496 crore, Power Grid is India’s largest state-owned power transmission company in India. It is classified as a Maharatna PSU. It has an annual Return on Equity of 17%, which means that for every Rs 100 invested in the company, one makes another Rs 17 on it. The company has a Return on Capital Employed(ROCE) of 5.44% and Return on Asset(ROA) of 4.3% which means that it is utilizing its capital and infrastructure pretty efficiently. With 5G coming in and the rising electric vehicle market, the need for additional transmission grids are also likely to increase. Power Grid has also filed for an InvIT or an Infrastructure Investment Trust IPO. The IPO is likely to put the company in a favorable position in the markets.
Adani Transmission Ltd
Adani Transmission Ltd is the subsidiary of the Adani Group. It is the largest power transmission company in India. Adani Transmission Ltd. has:
- A 27,000+ megavolt ampere of transmission capacity.
- 3,000,000+ distribution customers
- 15,400 in transmission line length
Adani Group companies are almost intensively fuelled by debt, but it has a reputation of repaying and gaining a position with time. Adani Transmission over the years took huge debt burdens but managed to pay it back all in time. Most of its debt now is forex debt, which according to the company is cheaper than domestic loans.
The company transmits electricity to Mumbai, the financial capital of India along with holding assets in 8 other major projects. Adani Transmission has returned 1131.5% in the last 5 years. This means that Rs 1 lakh invested would have turned into 11 lakhs in a period of 5 years, from 2016 to 2021.
Torrent Power is a power generation, transmission and distribution company based in India. Torrent’s stronghold is the state of Gujarat where it transmits and distributes electricity to major cities. Apart from Gujarat, the company holds its presence in Bhiwandi(Near Mumbai), Agra(Uttar Pradesh) and other cities in Maharashtra. It has a total generating capacity of 3191.6 MW.
Some electricity that is produced isn’t able to reach the right customers through transmission and distribution lines in case of theft, damage or heat dissipation. This is known as T&D Loss. Torrent Power’s T&D loss is one of the lowest in the country, which is ~4.5% as compared to India’s average T&D loss of 20%. This means that Torrent Power has the right technology, surveillance and assets to supply electricity seamlessly.
Speaking from a financial perspective, the company has constantly rising Profit After Tax(PAT) and Sales Volumes. Over the past 5 years, the company has returned 31.2% on investment. The company’s Return on Equity stands at 12.82% as compared to Industry ROE of 9.5%.
Torrent Power Adjusted Profit and Net Sales(Source:Edelweiss)
CESC or Calcutta Electric Supply Corporation Limited
CESC Ltd. is a power generation, transmission and distribution in and around the city of Kolkata and a few districts of West Bengal. Along with West Bengal, the company also holds generation and distribution businesses in Rajasthan and Maharashtra.
The company did not fare well in the past 3-4 years, however, there have been recent changes in volumes. The sales volumes in West Bengal has crossed pre-COVID levels and their generation businesses in Rajasthan are likely to turn profitable pretty soon. Loses in the distribution business has reduced significantly. The company is likely to get a push with the Rs 3 Lakh crore stimulus package for electricity distribution companies. The company also offers one of the highest dividends to its shareholders in the power sector. Shares have gained 14.2% in the past 6 months since August 2020.
CESC Price Performance(Source: ICICIDirect)
Tata Power specializes in both generation and power supply. Close to 60% of Tata Power’s revenue comes from power generation, whereas the other 40% comes from transmission and distribution. Tata Power supplies electricity to the cities of Mumbai, Ajmer, and Delhi. It caters to around 26 lakh consumers in Mumbai and Delhi distribution areas, having close to 21,000 circuit kilometers in transmission and distribution grids. The company also holds ~10% market share in the rooftop solar(RTS) energy market in India.
During COVID-19 lockdown, like the rest of the sector, Tata Power too saw a reduction in transmission and distribution revenue segment. Tata Power has been focusing on reducing debt by selling non-core assets or assets that do not add to the core revenue of the company. It has managed to reduce close to ~14% of its debt in the past 1 year. The company’s debt to equity ratio has been decreasing constantly which signifies that the company has been cutting down on debt and catching up on equity in the company.
Privatisation and Delicensing of the power sector will indeed be a positive sign for Tata Power considering that it is the third largest power producing company in India.
The Indian Energy Exchange or IEX is an electronic power trading marketplace for electricity corporations and boards to trade contracts related to energy. In simple terms, just like how individuals can trade in the stock market to gain profit, electricity corporations can trade on the IEX to increase profitability and have better price discovery. All the three, i.e. Power Generation Companies(Gencos), transmission companies(Transcos) and Distribution Companies(Discoms) can trade on the IEX. IEX has recently seen a spike in volume due to volatility in electricity prices. marketfeed has dedicated two special articles on IEX.
To know more about how the company functions internally and the process of power trading, Click Here.
To know about, IEX as a stock to invest in, financial analysis, profitability and future prospects, Click Here.
Budget 2021 has received a positive response from the power sector. Finance Minister(FM) Nirmala Sitharaman allowed a much expected Rs 3 lakh crore to the power sector with the intention of reviving stressed discoms. The distribution of the fund will be over a period of 5 years. It will help in reducing losses and also improve efficiency along with increasing rural penetration. The FM also announced developing a framework for allowing the consumers to have their choice of electricity supplier. This will promote healthy competition and allow for healthy price discovery.
The FM also announced the aspects of the Electricity(Amendment) Bill 2021, wherein the power sector will be ‘delicensed’ and thereby give smaller power companies a greater opportunity to expand. Apart from this, the government has also announced a Rs 2,606 crore allocation specifically for the solar power sector and also laid emphasis on shifting from using coal as a fuel to renewables.
Invest In Power
The Budget 2021 was indeed a historical one as it addressed a needed boost after the impact of COVID-19. It addressed not only the problems of the distressed power distribution companies but also hinted that the renewable energy sector is taking off. India currently is undergoing a coal crisis. Coal resources are being depleted and renewable energy is relatively more expensive.
The Indian Power Sector is undergoing a major change, in a way that will change the market outlook for the first time in decades. The power policies in India are made in a way that politically benefits the governments of respective states. They are addressed to benefit the common man. This impacts the power companies as they are faced with reducing demand, falling profits, and increased costs. The power sector was given a ‘Negative Outlook’ by ICRA, a renowned credit rating agency. Due to the COVID-19 pandemic, the demand for power took a fall and dented the power sector.
The focus of power companies right now is to increase rural penetration, boost profits and achieve maximum efficiency. ‘Delicensing’ of the power sector will ensure less government intervention and increase cash flows for the power companies. India’s infrastructure boom, rising electric vehicle industry and the 5G revolution shall definitely enhance demand for the power sector. The future of the power sector is bright indeed.