Q2FY21 preview: Significant recovery for the power sector

Power demand recovered significantly in Q2FY21 resulting in improved thermal PLFs and subsequently higher offtake from Coal India (CIL). H1FY21 generation was lower, only 8.7% y-o-y (vs -16.4% in Q1FY21) and thermal PLFs improved 300bps from Q1FY21 to 49.6%. Peak demand reached 176.6GW on 18th Sep’20 (lower only 3.9% from FY20 levels of 183.8GW). This resulted in CIL registering 9.6% y-o-y growth in Q2FY21.

Opening up of the economy helped improve collections for discoms and further disbursal through PFC/REC scheme is expected to ease the receivables situation in coming months. This, combined with two other eagerly awaited developments – passing of Electricity Amendment Act and National Tariff Policy – are expected to result in sector re-rating. NTPC and Coal India are our top picks in the sector.

Several initiatives being undertaken by GoI to support the sector
These include: (i) Fiscal support via PFC/REC loans to discoms to the tune of Rs 900 bn ( Rs 278.5 bn already disbursed up to 1st Oct’20; quantum may be enhanced); (ii) privatisation of distribution in UTs (Chandigarh, Puducherry and Daman & Diu to be completed within FY21; and (iii) coal gasification/liquefaction through projects totalling Rs 400 bn.

Additionally, GoI is expected to release the National Tariff Policy shortly, which will address most of the prevailing issues in the sector. These measures are in addition to the National Infrastructure Pipeline, which envisages investments of Rs 25 trn in the sector over FY20-FY25, and the Electricity Act amendment, expected to be tabled in the winter session of Parliament.

Q2FY21e preview – Key actionables
Maintain NTPC as one of our top picks: Significant capacity commissioning may continue (>5GW addition expected in FY21) while improvement in capital efficiency and integration of acquired assets is helping drive strong earnings growth. NTPC’s Q2FY21 earnings are expected to increase 3.6% y-o-y, although PAT may be slightly impacted if part of the balance Rs 5.5 bn rebate is provided. A large quantum of the rebate is expected to recover in FY21 itself through higher LPS expected as states continue to defer payments. We expect further recovery in coal PLFs going forward. Maintain BUY with TP of Rs 165.

Coal India is our other top pick: Improvement in demand resulting in higher thermal PLFs supported by Coal India’s initiative to push e-auction volumes by lowering premiums and import substitution resulted in higher volumes in Q2FY21. In Q2FY21, production was 115.1mnte (+10.6% y-o-y) and offtake was 134.2mnte (+9.6% y-o-y). We expect coal PLFs to recover further from Q3FY21 onwards which will help maintain coal offtake growth momentum. We estimate CIL’s Q2FY21e profit to increase by 9.9% y-o-y. Maintain BUY with TP of Rs 258/share.

IPPs: We expect higher profits y-o-y for JSW Energy (+3.3%) but lower profits y-o-y for Torrent Power (-45.6%) and CESC (-13.5%) in Q2FY21e. Each of the three companies was able to recover from the lockdown impact during the quarter. Since CESC and Torrent are involved in distribution franchise business as well, they were affected more as these businesses were badly hit due to billing and collection issues, and although they have recovered they are still below pre-Covid levels.