Indian Power Sector Sees Rerating Amidst Evolving Market Dynamics
The Indian power sector has experienced a significant re-rating, leading to elevated valuations for many stocks, according to a recent analysis by Motilal Oswal Financial Services (MOFSL). Despite these higher valuations, MOFSL suggests there are still upside risks to earnings for certain players, driven by seasonal demand and strategic positioning.
Merchant Tariffs Boost Untied Capacity Players
MOFSL highlights that elevated merchant tariffs, fueled by seasonal demand, are expected to bolster the profitability of companies with higher untied capacity. Firms such as JSW Energy and Adani Power are well-positioned to benefit from this trend. JSW Energy, for instance, could see its FY27 profit increase by 10 percent due to higher merchant realization of Rs 2.5/kWh.
Conversely, the impact on NTPC is anticipated to be relatively muted due to its regulated portfolio mix, which provides stability but limits exposure to fluctuating merchant prices. MOFSL also noted potential downside risks for NTPC Green Ltd.'s ambitious 8GW FY27 commissioning targets.
Wind Energy Segment Presents Attractive Valuations
While the broader utilities sector is trading at a P/E of 20.2 times—a 51 percent increase over its 10-year average—MOFSL points to the wind energy segment as an area of potential value. Suzlon Energy and Inox Wind, despite an expected strong earnings CAGR of 31-32 percent over FY25-28E, are trading at relatively lower valuations compared to the sector average.
“While Suzlon remains a bellwether play in the wind energy segment, Inox Wind is also witnessing improving investor interest, supported by relatively attractive valuations,” MOFSL stated.
Renewed concerns over energy security in Europe are also reviving interest in offshore wind, a trend that could positively impact Indian wind turbine manufacturers. New product launches designed for varied wind regimes are expected to enhance India's export competitiveness in this sector.
Solar and Exchange Players Under Scrutiny
In the solar segment, companies like Waaree Energies and Premier Energies have seen significant rallies, leading to a sharp rise in their valuation premiums. MOFSL's focus remains on the structural oversupply in modules, the pace of utilization ramp-up in cell manufacturing, timelines for ingot-wafer localization, and the potential for further backward integration into polysilicon.
ACME Solar is identified with an earnings upside risk in the June quarter, primarily driven by strong merchant prices following the commercial operation of its 2.3GWH Battery Energy Storage System (BESS) capacity.
For the Indian Energy Exchange (IEX), market coupling continues to act as a key overhang on investor sentiment. However, MOFSL suggests that current valuations, at 21.7 times FY28 earnings, imply limited downside risk. Primary investor concerns revolve around the implementation timeline of market coupling in the Day-Ahead Market (DAM) and potential regulatory risks, including transaction fee revisions.