Mr. Anuj Upadhyay, Institutional Research Analyst, HDFC Securities
Generation growth slowed down in Sep'21 to 0.2% YoY, after registering a strong 17% YoY rise in Aug'21, due to subdued power demand, given the heavy monsoon. However, demand revived in Oct'21, rising ~5% YoY month to date, as supply fell short of it by 1.4% due to falling coal inventories across plants. Coal stocks declined 78% YoY across stations with 93 plants having stocks of less than 4 days, as on date. The demand-supply deficit led to ~300% YoY/150% MoM rise in merchant rates in Oct'21 to INR10.9/unit. Coal dispatches to power sector are expected to improve in the coming days with CIL regulating its supplies to other sectors and speeding up evacuation of its ~40 MT of inventories lying at its bed. The outstanding dues of discoms, as of Oct'21, remain at INR963 bn (-24% YoY but +2% MoM due to rise in power offtake). The proposed reforms like the Draft Electricity Amendment Bill, smart metering, and Direct Benefit Transfer scheme would be the silver lining that can revive the sector. NTPC, PGCIL, and CESC are our top picks.
Demand revives in Oct'21: Power demand, which remained subdued at 1.2% in Sep'21, has grown ~5% YoY in Oct'21 with the passing of monsoons and arrival of festive season. Generation in Sep'21 remained flat for the coal segment (+0.4% YoY) but was down across the gas (-21.3% YoY), hydro (-5.7% YoY) and nuclear segments (-2.3% YoY). However, renewables (RES) saw strong 19.8% YoY rise in generation in Sep'21. Overall generation remained flat at +0.2% YoY in Sep'21.
NTPC's generation was flat YoY: NTPC's generation remained strong with 10.4%/9.4% YoY increase in Sep'21/Q2FY22. However, it fell significantly across the Tata Power stations by 56.8%/40.5% YoY during the same period due to lower generation across the Mundra plant (on rising coal prices). During Q2FY22, generation increased for NHPC (+2.9% YoY), while it remained flat for CESC (+1% YoY). Generation declined for JSW Energy (-12.8% YoY) in Q2FY22.
Coal stock deteriorates and merchant rates zoom on higher demand: Coal stocks across power stations deteriorated in Oct'21 with as many as 93 stations having supercritical level of inventories (<4 days of coal stock). Low operation of imported coal-based stations due to steep rise in international coal prices (+215% YoY to US$160/tonne), rise in freight cost, robust power demand due to rise in temperature, arrival of festive season, supply restrictions by CIL to ~14GW of capacity for non-clearances for past dues, and low coal inventory across power stations during Sep'21 led to a 78% YoY decline in coal stocks across power stations. Also, lower wind generation across Tamil Nadu, Gujarat, and AP forced them to procure power from the spot market. Supply crisis led to a ~300% YoY rise in spot rates to INR10.9/unit during Oct'21. However, with the intervention of coal and power ministry, the situation is expected to be normalised in 7-10 days with CIL expected to enhance its dispatch and clear off ~40 MT of its inventory. Also, with few states agreeing to procure power at higher rates from Mundra stations and the onset of winter in Nov'21 should bring down the deficit.
Our view: While the overall demand/generation increased ~13% YoY each in YTDFY22, we expect power demand to rise 12% in FY22, led by the country's improved economic activity. The central government's liquidity package under the Atmanirbhar scheme has significantly improved liquidity for discoms. Further, with CCEA approving the INR3.03trn reform-linked package, we can expect improved infrastructure Capex from discoms over the next 3-4 years. This would, in our view, lower AT&C losses, nullify the ACS-ARR gap, and promote private participation in the discom space.