Top Stock Picks: HDFC Securities Has Buy Call On These Energy & Power Stocks

In the month of February, the brokerage firm HDFC Securities put a special emphasis on the energy and power industry. NTPC Ltd, a large cap firm, and CESC Ltd, a mid cap company, both have a buy call rating in this category. Both of these firms are in the power industry, and the brokerage has put NTPC's target price at Rs 165 and CESC's at Rs 119.

The brokerage has claimed "Generation growth declined by 0.7% YoY in Jan-22, as demand was muted due to partial lockdowns in states (amidst concerns of a third COVID wave) and the peak winter season. In the MTD Feb-22 period, however, demand growth stood at 3.4% YoY, as lockdowns have eased and temperatures have risen slightly. Coal dispatches to the power sector surged by 40% YoY to 63.2 MT in Jan-22. Lower power demand and improved coal supply led to a 3.4x increase in coal stocks at stations, compared to the critical levels of Oct-21."

As per HDFC Securities "The base deficit/peak deficit remained flat MoM at 0.3%/0.1%, while the merchant rate surged to INR4.2/unit in Feb-2022. As of February, discoms' outstanding dues have risen to INR1,077 bn (+19.5% YoY/+1.0% MoM). We expect power demand to revive from Mar-22. NTPC, PGCIL, CESC, and Tata Power are our top picks."

Company	Reco	Target Price	P/BV (x)	PER (x)
NTPC	BUY	165	0.9	7.4
PGCIL	ADD	233	1.5	9
NHPC	ADD	33	0.8	7.5
CESC	BUY	119	1.4	9.7
JSW Energy	SELL	118	3.2	43.3
Tata Power	ADD	258	2.6	27.6
Torrent Power	ADD	555	1.7	11.4
Source: HDFC Securities

The brokerage has highlighted that "NTPC's generation increased marginally by 1.6% YoY in Jan-22. It fell significantly at the stations of Tata Power (-31.4% YoY), Lanco (-25.6% YoY), JSW Energy (-25.4% YoY) and Adani Power (-18.2% YoY) since it was lower at their imported coal-based stations due to rising coal prices. Generation also fell at NHPC (-7.5% YoY) and CESC (-6.5% YoY) but was up at SJVN (+8.4% YoY). It grew substantially for GVK (+248.3% YoY), GMR (+91.0% YoY), and GIPCL (+41.6% YoY)."

HDFC Securities noted that "While the overall demand/generation increased ~8.2% YoY each in YTDFY22, we expect power demand to rise in the range of 8-10% in FY22. The proposed Electricity Amendment Bill 2021 has been delayed as the Centre has dropped the DBT on power subsidies from the bill, besides dropping the provision of creating a new Electricity Contract Enforcement Authority. However, with the 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. NTPC, PGCIL, CESC, and Tata Power are our top picks. We also upgrade Torrent Power rating to ADD from REDUCE, as the stock price has corrected steeply since our result update note and the stock is fairly valued at the CMP of INR482."