Discom health improving gradually; NTPC, Power Grid, PFC top picks: Nikhil Nigania

"This year weather has been less warm compared to last year which is pulling down this demand on top of the high base of last year. So, near-term, yes, it could be low, but medium to long-term 1x real GDP which is 6% to 7% that is what we think should hold on power demand," says Nikhil Nigania, Director, Bernstein.

Let us start with the power demand which has witnessed a month-to-month slip in April from what we understand. While, of course, growth has picked up in the second half of the month despite lower temperatures compared with last year on a year-on-year basis is actually up 2%. Given this trend where do you see demand going ahead in the summer.
Nikhil Nigania: So, power demand is actually, I mean, the heart of the sector that is the key driver for the entire sector. So, for three years 21 to 24 we saw like an 8-9% CAGR in power demand growth. FY25, it slowed down to five-ish percent. April month it is about 2% YoY growth on a very high base as temperatures were lower than last year. Going forward May also there is a possibility that it could stay in low single digits, possibly even be lesser than last year given last year May numbers was a super high base of almost 12-13% growth due to both elections and a very-very hot summer.

So, this year weather has been less warm compared to last year which is pulling down this demand on top of the high base of last year. So, near-term, yes, it could be low, but medium to long-term 1x real GDP which is 6% to 7% that is what we think should hold on power demand.

Given the softness that we are seeing in the demand right now, do you believe that the price hikes will not take place anytime soon?
Nikhil Nigania: So, the power, near-term impact on prices is on the spot power prices. So, if you look at the spot power prices, January to March was down YoY. April was flat YoY. Going forward in the year also we do not expect spot power prices to be higher than last year.

We expect them to be in line with last year at best, which is around Rs 4, Rs 5 per unit during summers and yes, around four later half of the year. So, we do not expect spot prices to be higher than last year.

We have got reports suggesting that the government is actually call on the states actually to make sure that there is enough power supply actually throughout the country given the fact that we are going to hit the peak of the summer season as well. But do you believe that the government is in the position to actually cater to the demand as and when it goes? No doubt, the May demand you said that it will be a tad bit lower, but let us not forget the base is pretty high. So, what kind of coal reserves that the government has to support this demand? Have you done any channel checks on that particular front, you can help us with some details on that.
Nikhil Nigania: See on the supply side coal availability is at one of the highest points we have seen in the last few years. Whether we look at coal stock at power plants, whether we look at coal stock at mines, coal is absolutely not a concern.
There is abundant coal availability. And in terms of making sure plants and up and running, definitely government has done a good job to ensure all the thermal plants are ready for the summers as they come.

They have also given pass through for imported coal-based plants. They have extended an emergency clause section 11 so that imported coal based plants of Tata Power, Adani Power are up and running during the summer months.

So, supply side from government side all the effort is there, but if you look at the evening hours of the day, in the afternoon we have sufficient power, but in the evening hours it is still a very tight demand-supply situation and that is when the prices shoot up to Rs 10, that we do not see change for the next three to four years at least in the summer seasons. So, the evening power shortage or the tightness we think will continue.

But along with that also give us a sense that where do you see and how do you see rather the demand shaping up when it comes to the solar modules because what we are getting to see that there are a lot of if and buts that how this sector will perform given the uncertainty, that how India demand will pick up once this policy push is abated, along with that there is another story panning out with respect to the US exports. Give us some sense that how do you see this story moving as well as how could it actually impact the listed players.
Nikhil Nigania: So, on the solar side, see India has an aspiration to add about 50 gigawatt of renewable air. We think we are likely to be between 30 and 40 gigawatt of renewable air and largely very solar heavy.

The headwinds near-term the sector is facing are two, one is availability of land which is becoming a challenge, large contiguous land parcels, and second is availability of grid connectivity, which is again not easy to get. So, these two are the reasons why the gap between government estimates and our estimates on the solar addition side.

Now, coming to the solar module manufacturers per se where listed players are there, they are also listed players in generation but solar module manufacturers near-term they are having a phenomenal run in earnings, their roes are almost 40-50%.

Manufacturing facilities are becoming free in two years. But two years out we think there will be a glut in supply. Demand, as I discussed, would be 30 to 35 gigawatt of solar, but supply is likely to be much more than that on the manufacturing side and we see a lot of players add capacity. So, renewable we are a bit more cautious.

Thermal is where we are a bit more positive and within renewable also we find both the generators and even the equipment suppliers richly valued per se.

The power ministry has written to states to ensure sufficient maintainance of power supply, though renewable energy stakeholders, of course, have raised concerns over the entire PPA issue in the past as well and, of course, delayed PPAs as well. Excess renewable energy bids, low demand from discoms. Do you think any of these woes are going to go away anytime soon given demand is going to expand?
Nikhil Nigania: Yes, so renewable PPA is not getting signed, has been probably the third challenge which I am just talking about. So, renewable PPA there is definitely a push from the centre to the states to sign PPAs. But if you look at from a states’ perspective, see there are lot of renewable tendering which happened in the last two years.

It is very difficult for states to absorb that kind of renewable power especially in the solar hours because on the one hand we are adding rooftop solar systems which is other push the government has and on top if you look at the power prices, the spot power prices in the afternoon hours they are as low as Re 1, even lesser than that on some days.

So, the incentive for discom to sign renewable PPAs is a bit lesser right now. Will it change a year down? Of course, I mean cyclicality is there, we did a lot of tendering hence there is a backlog of unsigned PPAs created. In a year or two we think it will get cleared, but near-term we think the reluctance from discoms to sign PPAs on renewable will continue.

Last time we spoke and in last time in one of your reports you did mention that there is some concerns arising out of discoms and maybe that is going to be an issue going ahead. Do you think that problem has abated about discoms and the backlog and the dues?
Nikhil Nigania: Historically, discoms have been the Achilles heel of the sector, I mean payments from discoms have been a big challenge historically. Right now though given the central government schemes to enforce these payments, receivables are I mean really good for most generators, so it is not an issue right now.

Discom payments. AT&C losses of discoms, headline numbers show a bit of deterioration, but there also we think adjusted for subsidies losses have not increased, they have actually gone down for some of the discoms.

So, discom health not great, are still lossmaking entities, almost all of them except a handful, but directionally are they getting better? Yes, they are. So, we are not concerned on discom health at present. It needs to get better, but directionally it is getting better slightly and privatization like Uttar Pradesh is trying to do that, I think it is a great step to take as well to improve health of discoms.

Now that we have discussed what has really been happening within the power space right now, let us talk stocks then and tell us which are your top bets within the power space right now because I believe that especially in the solar manufacturing side you are not that bullish because you recently initiated coverage on both of these stocks in the listed plays and the target price is much lower than the current market price, but which stocks could outperform going ahead?
Nikhil Nigania: We prefer public sector name private ones, we prefer thermal over renewable, we prefer grid plays.
So, we continue to like NTPC in our coverage the most, then we have like Power Grid. We even like the power sector lenders so PFC, REC although they carry more risk than what an NTPC or a Power Grid does.

Then, on the underperform side we are underperform on IEX and even on the solar manufacturers as you rightly mentioned due to the supply glut we envisage.