Why are Power Stocks on the Rise?
Indian power stocks are on the rise in recent weeks. The BSE Power Index is up 17% in the past month and in the past week, it has rallied 7%. Most of the key power stocks including NHPC, NTPC, Adani Green, Tata Power and JSW Energy have been on the rise in the past few weeks. On average, in the past week, the stocks have gained nearly 12%.
The summer season is one of the key triggers, among other factors, for such a rally in power stocks. Read more to find out about the rally in power stocks and understand whether such a rally could hold going forward.
Reasons for the Rise
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Heatwave
Change in the season to summer is one of the important reasons for the rally in power and energy stocks. Most states, particularly in northern India, have already started witnessing heat waves and the situation is likely to worsen. That is, more heatwaves could be recorded in the coming months. The high usage of air conditioners (AC) and coolers would draw high power, and thereby increase the power consumption.
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Demand-Supply Gap
About 75% of India’s power generation comes from coal. And the largest supplier of coal for power plants is Coal India.
While India’s Coal India is capable of meeting both domestic and international demand, it doesn’t have sufficient supply. Further, considering that various states in India are easing covid related restrictions and businesses are operating at full capacity, the demand domestically has risen. This has led to a rally in power stocks. According to Government data, power demand for the year 2021-22 (up to January 2022) there is already a supply crunch of 1.2% from the peak demand. Many experts say that with the demand likely to increase, the supply gap could also widen.
Further, according to multiple media reports, Coal India is restricting its deliveries to industrial consumers (non-power sector) to cater to the rising demand for power plants.
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Other Factors
The demand for coal or power has been high in the international market since September last year. So the prices for coal or other energy products had been high. Therefore, importing coal could be difficult.
Many experts believe that India may face supply bottlenecks to meet the growing demand for coal in the coming months. This is because the supply of coal from major (coal-producing) countries took a hit due to heavy rains last year. Therefore, increasing supply in a short period could be difficult.
As per some experts, in the short-term, the power stocks including Coal India, NTPC, Tata Power, Power Grid and JSW Energy could see an uptick, but experts are divided in this view. Considering the high cost of coal and elevated crude oil prices, the power generation companies could feel this increase in their costs. Unlike other companies, they may not be able to pass on the cost increase to the end-users. Therefore, power stocks may turn downwards until the supply issues are sorted.
Investors Takeaway
If you, as an investor, are looking to invest in power stocks to ride the uptrend in the market, keep in mind that the returns on your investment depend on the respective company’s financial performance.
For instance, Tata Power has been on the rise in the past few months due to positive business prospects including a higher focus on renewables, transmission and distribution, rooftops for customers, and EV charging facilities. Further, Tata Power has partnered with various companies like TVS, Apollo Tyres and HPCL for EV infrastructure facilities. Similarly, power stocks like NTPC and Power Grid are rising due to a positive demand scenario in the next few months and could cash in on the same.
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Research Analyst: Bavadharini KS