Eyeing power sector stocks? Keep these three factors in mind

If there is one set of stocks that has beaten the benchmark index comprehensively over the last two years of the Covid-19 pandemic, it is the BSE Power index.

The index of 12 stocks has risen more than three-fold from the lows of March-April 2020, as against a two-fold increase in the 30-stock Sensex.

This is partly due to the steady rise of three Adani Group companies—Adani Green, Adani Transmission and Adani Power—which are all part of the index.

Unlike the benchmark indices that have tried and failed to break the all-time high three times over the last one year, the BSE Power index had a secular rise to hit its peak a few weeks back. To be sure, it has given up around 15% of the gains since then, again due to the drop in Adani Group companies.

So how do we gauge the power stocks within the index?

Key factors

We bring you three factors to watch out for and decide on one’s risk appetite for the sector based on these parameters.

·       Demand: Year on year electricity demand growth jumped to 23.6% in May 2022 (as of May 27) as per provisional data from Power System Operation Corporation Ltd (POSOCO), partly due to lower base, from 14.6% in April 2022 on the back of lower base and soaring temperatures.

This makes for an acceleration in demand for the second consecutive month after demand rose by a modest 6.6% in March 2022 over the year-ago period. The demand uptick is due to the severe heat wave in north India. The demand growth for FY2023 is estimated at 6-6.5% by rating and research agency ICRA.

·       Tariff: Spot power tariffs saw a dip in May 2022 from the peak of April 2022. However, they remain high as a result of elevated demand and continued supply-side constraints.

Average tariffs in the spot power market reduced to Rs 6.8 per unit in May from Rs 10.1 per unit in the previous month with generation from other sources starting to improve, albeit remaining high compared to historical average with the continued supply-side constraints and elevated demand level.

The tariffs are expected to moderate in the near term, with the pick-up in generation from other sources like wind and hydro and moderation in demand in line with the seasonality.

·       Feed: Coal stock levels continue to remain low in May 2022 with coal supply and consumption remaining at par. The coal supply to the power sector increased by 18.1% in April on a year-on-year basis to meet the growing demand from power utilities.

Despite this increase, the stock levels remain low at eight days as on May 26, against the normative requirement of 24 days at the all-India level. This is owing to the rising demand and limited use of imported coal, given its high price levels.

In this context, the Indian government has directed all domestic coal-based power plants to import and blend coal to the extent of 10% of the requirement with a pass-through arrangement to meet the soaring demand.

So, if you are looking to invest in power stocks, do consider these factors before you take the plunge.