The Indian electricity sector has been operating at full capacity, but Bernstein noted in its most recent strategy note that this is a cycle that will eventually come to an end. It brought to mind the tale of Abhimanyu from Mahabharat, who was able to enter the "Chakravyuh" but was unable to exit it.
Regarding the power sector, the brokerage stated, "None of us want to be the Abhimanyu of this story," looking back at the last cycle to determine what caused the collapse and what industry indicators investors should be aware of. It is still optimistic about the electricity sector for the time being and thinks this is an early cycle.
According to Bernstein, merchant power prices are a high-frequency indication of impending doom. They peaked in April 2009 at Rs 8.4/kWh, after which they began to decline and brought down the entire industry, including financiers, utilities, and equipment.
Bernstein sees a far lower chance of grid restrictions, oversupply during non-solar hours, and DISCOM health deterioration. According to the report, the largest risk in the present cycle might be either a slowdown in demand relative to the predicted rise of 0.8–1 times GDP growth or battery economics, should sodium ion, for example, prove to be commercially effective.
As a result, the international brokerage believes that the current cycle's failure risks are significantly lower than those of the previous one, but Bernstein stated that it would continue to monitor demand, battery economics, and merchant power pricing in order to spot any indication that it is time to flee.
It is still favorable (though selective) for the industry as of right present. It still enjoys Power Grid and NTPC stock. The target price for Power Grid is Rs 315 and for NTPC is Rs 340. Net-net, Bernstein has 'Outperform' on NTPC and Power Grid and is 'Underweight' on IEX and Adani Green Energy. Its targets are Rs 110 on IEX and Rs 500 on Adani Green Energy Ltd.
"What led to the downfall last time: Put simply it was the first phase of privatisation of this industry- where surrounded by government agencies on all sides (coal, transmission, DISCOM), influenced by political objectives and funded by easy money from banks/ NBFCs (which had never seen a slide)- the sector went down the drain," Bernstein stated.
Recall that the power industry lost its license in 2003. In 2008, JSPL opened its first sizable private plant, which produced a 200% return on equity (ROE).
"Back then, we had a 17% power shortfall. In January 2008, there was the Reliance Power initial public offering, which received 73 subscriptions. The process was straightforward: sign an agreement with the state, obtain land to prove it, use the agreement to obtain a loan, award an EPC contract, begin construction, wait for coal, and then intend to sell on the market (at which point prices fell)," signified Bernstein.
It claimed that there were problems on the demand side, with power growth falling short of GDP growth. In FY10 and FY11, decreased industrial activity led to an average power demand growth of 5% compared to a 9% GDP growth.
It was mentioned that as more captive generation capacity came online, the requirement for grid electricity decreased.
In addition, it mentioned the DISCOM catastrophe. "If you believe that the state of DISCOM is poor right now, consider that in the most recent cycle, DISCOM under-recovery increased to 21% of supply costs in FY12 (compared to 2% in FY22). Even if power was available, they would rather load-shed than buy it because of how ill they were," the statement stated.
Coal shortage was one of the supply side's problems; from FY07–17, the rise in coal production was only 4% CAGR, despite a 10% increase in coal generating capacity during the same period. This forced companies to import coal or shut down operations.
The cost of imported coal increased 100% between May 2009 and January 2011. Furthermore, there was an abundance. On an existing base of 102 GW, India had 90 GW of thermal plants under development in FY10. According to Bernstein, the dispatchable power supply expanded at a compound annual growth rate (CAGR) of 11% between FY09 and FY16, whereas power consumption grew at a CAGR of 5% over the same period.
