Experts flag coal shortage amid rally in power stocks

They say current up-move in Tata Power and NTPC only is news-driven

The sharp rally in power sector stocks over the past few weeks has turned analysts cautious about this space and they suggest fresh investment at these counters be made from two-three years’ horizon. Over the past month, the S&P BSE Power Index has gained over 6 per cent, outperforming the Sensex that has moved up around 1 per cent. Tata Power, NTPC, Indian Energy Exchange, and Power Grid Corporation of India have moved up 9 per cent to 22 per cent during this period, the ACE Equity data shows.

“One cannot paint the entire sector with the same brush. Though the run-up does warrant some caution, valuations of most power sector stocks have been attractive for years but it is only now that these stocks have started rallying. Moreover, stocks — such as Tata Power (foray into solar energy) and NTPC (listing of subsidiaries, news denied by the company) — are newsdriven. This is not the time to make a fresh investment in these stocks; it is for those who can hold on for now,” said A K Prabhakar, head of research, IDBI Capital.

Last week, Tata Power hit a 13-year high of ~165 (the previous high was ~158 on January 4, 2008) on reports that the company is looking at new business growth through rooftop solar and microgrids, electric vehicle (EV) charging infrastructure, home automation, and smart meters.

Taking stock

Even as India’s demand for power is rising steadily, physical coal stocks have hit dangerously low levels, and alarm bells are going off in the country’s power sector, according to S&P Global Platts. India’s average power demand increased 23 Gw year-on-year to 186 Gw for the period between August 1 and August 23. It expects the average power demand from October to December 2021 at 167 Gw, with coal-powered generation at 126 Gw — about 12 Gw higher year-on-year.

“India’s total coal stock stood at 37.41 mt at the start of 2021, according to the country's Central Electricity Authority.

At the operational level, analysts caution that though the coal shortage and the rise in prices are a short-term phenomenon, the rally in power sector stocks warrants some caution

This has dropped to 8.317 mt as of September 27 — sufficient only for five days of coal burn. The FOB (free on board) price of 4,200 kcal/kg GAR (gross as received) coal from Indonesia rose 125.34 per cent from $44.4 per mt on January 1 to touch a record-high of $100.05 per mt on September 29,” Platts said.

That said, at the operational level, analysts caution that though the coal shortage and the rise in prices are a short-term phenomenon, the rally in power sector stocks warrants some caution. Earnings of electric utilities, such as NTPC and Power Grid, according to analysts at Kotak Institutional Equities, are regulated and linked with their equity base, while earnings of downstream oil companies may be at risk if they are unable to raise retail prices of automobile fuels to pass on the increase in crude oil prices.

“The recent sharp rally in prices of certain energy-related PSU stocks defies fundamental logic. The usual casual narratives of catch-up trade, liquidity, and rotation are irrelevant when viewed in a more fundamental context. We doubt much has changed for even oil, gas and consumable fuels companies (Coal India, ONGC) that benefit from higher energy prices in the short term. They still face an existential threat from renewable energy, unless they are able to reorient their business models,” wrote Sanjeev Prasad, co-head, Kotak Institutional Equities in a recently co-authored note.