Bernstein Shifts Investment Focus in India's Power Sector
Foreign brokerage firm Bernstein has issued a new research note, recommending a strategic shift for investors in India's power sector. The firm suggests prioritizing private thermal and pumped storage projects over the currently popular solar plus battery energy storage systems (Solar+BESS). This recommendation comes with specific ratings: Bernstein has assigned an 'Outperform' rating to Tata Power Ltd, JSW Energy Ltd, and NTPC Ltd, while placing Adani Green Energy under an 'Underperform' rating.
The target prices set by Bernstein indicate a potential upside of 23-34 percent for Tata Power, JSW Energy, and NTPC, contrasting sharply with a projected 22 percent downside for Adani Green Energy.
Why Thermal and Pumped Storage Over Solar+BESS?
Bernstein's analysis highlights a clear distinction in competitive intensity across different power generation segments. The firm notes that while the investment crowd is largely pursuing Solar+BESS projects, the real opportunity lies in private thermal and pumped storage. This is evident in tender participation: pumped storage and thermal power projects typically attract 3-5 bidders, whereas Solar+BESS projects see upwards of 20 companies competing.
The brokerage points out that thermal power projects face limitations due to equipment and plant size, and pumped storage projects are constrained by access to strategic sites. In contrast, Solar+BESS projects lack significant barriers to entry, leading to heightened competition and potentially thinner margins.
Addressing Challenges in Renewable Tenders
A significant concern with many renewable tenders, according to Bernstein, is that attractive tariffs often fail to translate into firm off-take agreements. When evaluating power storage options, particularly for tenders without integrated solar components, Bernstein sees a higher probability of contracts converting into firm Power Purchase Agreements (PPAs), even with potential price adjustments from DISCOMs.
Further incentivizing Pumped Storage Projects (PSPs) is a government waiver on transmission charges for 25 years from the Commercial Operation Date (COD), applicable to projects awarded construction work on or before June 30, 2028. Recent SECI tenders, requiring commissioning within three years from the PPA date, have also contributed to reduced competition, making these projects more attractive. Bernstein estimates that such bids could yield over 20% equity Internal Rate of Return (IRR) for companies like Tata Power.
Key Players: Tata Power, JSW Energy, Adani Green, and NTPC
Bernstein identifies JSW Energy as an early mover in this strategic shift. Tata Power, despite its smaller scale, benefits from existing reservoirs at its operational sites, providing a significant advantage for pumped storage development.
- Tata Power: Target price of Rs 430, implying a 34% potential upside.
- JSW Energy: Target price of Rs 623, implying a 23.4% potential upside.
- NTPC: Target price of Rs 450, offering a 27.7% potential upside.
- Adani Green Energy: Target price of Rs 1,000, suggesting a 22% potential downside.
The brokerage emphasizes that the government's intent regarding PSPs is clear, aligning with global trends, as even China, a dominant battery producer, is tripling its PSP capacity.