Motilal Oswal Financial Services (MOFSL) has published a fresh analysis of the power sector, indicating that while many stocks have experienced significant rerating, their valuations are no longer considered inexpensive. Despite this, MOFSL identifies potential upside risks to earnings for several key players, driven by factors such as elevated merchant tariffs and renewed interest in renewable energy segments.
Overall Market Dynamics and Valuations
The utilities sector is currently trading at a price-to-earnings (P/E) ratio of 20.2 times, representing a substantial 51 percent increase compared to its 10-year average of 13.4x. MOFSL notes that industry giants like NTPC, Tata Power, and PowerGrid are now trading near or above their one-year forward P/E mean plus one standard deviation. Conversely, wind energy companies such as Suzlon Energy and Inox Wind, despite projected strong earnings Compound Annual Growth Rates (CAGR) of 32-31 percent between FY25 and FY28, are trading near or below their one-year forward P/E mean minus one standard deviation.
Wind Energy: Suzlon and Inox Wind
The wind equipment manufacturing segment has seen moderate investor attention, but MOFSL suggests a resurgence of interest, particularly in offshore wind, fueled by energy security concerns in Europe. This trend could positively impact Indian wind turbine manufacturers. Suzlon Energy remains a bellwether in this space, while Inox Wind is also gaining investor traction due to its relatively attractive valuations. New product launches designed for varied wind regimes are expected to boost export competitiveness for these firms.
Merchant Tariffs and Untied Capacity Beneficiaries
MOFSL highlights that elevated merchant tariffs, largely driven by seasonal demand, are poised to bolster profitability for power generators with higher untied capacity. JSW Energy and Adani Power are cited as direct beneficiaries of this trend. For instance, JSW Energy Ltd's potential Rs 2.5/kWh higher merchant realization could increase its FY27 profit by 10 percent, despite the stock remaining flat over the past six months.
NTPC: Regulated Portfolio and Green Energy Outlook
In contrast, NTPC Ltd, with its predominantly regulated portfolio mix, is expected to experience a relatively muted impact from higher merchant prices. While NTPC's stock has risen 21 percent in the last six months, MOFSL points to a potential downside risk regarding NTPC Green Ltd's ambitious 8GW commissioning target for FY27. NTPC Green's stock has seen a 10 percent increase over the same period.
Solar Segment: Waaree Energies and Premier Energies
Following significant rallies of 29 percent and 35 percent respectively, Waaree Energies and Premier Energies have seen their valuation premiums over smaller domestic players sharply increase. MOFSL's focus for this segment remains on the structural oversupply in modules, the pace of utilization ramp-up in cell manufacturing, the timeline for ingot-wafer localization, and the potential for further backward integration into polysilicon production.
Indian Energy Exchange (IEX): Overhangs and Limited Downside
For the Indian Energy Exchange (IEX), market coupling continues to act as a significant overhang on investor sentiment. However, MOFSL suggests that current valuations, at 21.7 times FY28 earnings, indicate limited downside risk. Investor concerns primarily revolve around the implementation timeline of market coupling in the Day-Ahead Market (DAM) and its potential extension to other segments like Real-Time Market (RTM). Regulatory risks, including possible transaction fee revisions, also remain key sensitivities for the stock.