Could Power Stocks Witness a Rally Like Defence Stocks in 2024

Defence stocks were among the top performing stocks of 2023. Investors and traders alike were extremely bullish on them for the short term and long term.

This sentiment hasn't changed but it wouldn't be wise to expect the same kind of market-beating performance from defence stocks every year.

It's perfectly reasonable to assume that these stocks may take a breather this year or at least slow down their rapid rise.

In that case which sector will take up the mantle of the hottest sector of the year? Could the power sector step up to this challenge?

Let's examine this...

India's Power Sector is on a Roll

The Indian economy has bounced back strongly from the recession of 2020 due to covid.

With rapid economic growth comes a rapid increase in electricity consumption.

In fact, so sharp was the recovery in power demand, there was a time when coal plants were struggling to keep up. The government's direct intervention was needed to solve that problem.

Now, most power plants in India are running close to full capacity and fuel supply is not a big challenge anymore. Thus, growth will come from an increase in capacity.

India's biggest power firms along with their suppliers have already begun this process. They're rising to the challenge of meeting steadily growing demand.

India's electricity consumption is expected to grow at about 7% for the near future. So, we can expect the sector as a whole to grow at this pace.

Capacity addition will likely grow at an even faster rate. And of course, some firms will grow faster than others.

Therein lies an opportunity for investors.

The Raw Material Challenge

Most of India's electricity is coal-based thermal power. The supply of coal proved to be a challenge during the re-opening phase of the economy after the lockdowns.

This is because electricity demand bounced back strongly and coal power plants did not have sufficient reserve stocks of coal. Even worse, an irregular monsoon had hindered supply of coal from Coal India.

Some power firms had to import expensive coal from the global market. The government had to intervene to ensure supplies from Coal India were delivered on time. Special trains had to be run for this purpose.

Thankfully, the sector has put these woes behind it. Coal India has taken steps to prevent a repeat of such a supply crunch. Global commodity prices have also fallen. This will ensure that input prices for India's power plants, at least in the short term, won't hurt margins.

Combine stable or improving margins with solid revenue growth and we get above average profit growth. This is exactly what the stock market likes.

Government's Support

India's target to become net carbon zero by 2070 ensures that the government will likely allocate a decent amount to the power sector.

The FY 2023-24 Union Budget allocated Rs 73.3 bn for solar energy, a jump of 48% from its revised estimates. It included grid, off-grid, and the Pradhan Mantri Kisan Urja Suraksha Evam Utthaan Mahabhiyan (PM-KUSUM) projects.

From the allocated budget, Rs 49.7 bn is towards interactive-grid, Rs 20 bn for PM-KUSUM, and Rs 3.6 bn for off-grid solar energy projects.

Wind energy projects bagged an allocation of Rs 12.1 bn and Rs 2.8 bn was allocated to the national green hydrogen mission.

The government's estimate is that demand for power in India is also likely to grow approximately 1.6 times in the next 4 years.

As of November 2023, India's power sector has an installed capacity of 426 gigawatts (GW) and is expected to grow to 692 gigawatts by 2028. This translates to a compounded annual growth rate (CAGR) of 12.9%.

All this is bullish for the sector. The upcoming Union Budget could have more good news in store for power stocks.

Look Beyond the Largecaps

The market has noticed the positive developments in the sector and power stocks have responded to the same.

Largecaps like NTPC were up 87% in 2023. Its green hydrogen roadmap was looked at favourably by the stock market.

However, as investors you shouldn't confine your choices to the frontline stocks. An ideal investing strategy in power stocks should encompass the entire value chain.

Consider engineering firms that are suppliers to power plants. Consider the companies playing a role in the transportation of coal. Also look at the intermediaries, i.e. the companies involved in the actual supply of electricity to the end consumer as well as the power trading firms.

Pay particular attention to the renewable energy stocks. This is the big focus area of the government as well as the private sector.

Clean energy stocks are the biggest beneficiaries of India's EV boom. So, this is a megatrend you should not ignore.

And then there is the smart metering space. This is an exciting new megatrend that will change the sector forever in a positive manner. Read more about smart metering here.

Conclusion

Power stocks are looking like a good choice for investors in 2024 and beyond. The entire sector is in a secular long-term bull market due to India's steadily rising power demand as well as the renewal energy and EV megatrends.

Trends like urbanisation and rising disposable incomes will only lead to higher demand for electricity as. This will be driven by consumers purchasing items like ACs, refrigerators, decorative lighting, smart TVs, as well as multiple cell phones, tablets, smart watches, laptops, and desktops in a single home.

This megatrend will certainly create many wealth building opportunities in stocks across the entire power value chain. 2024 could provide the right opportunities to buy these stocks at reasonable prices.

However, investors should not go overboard on this megatrend. Do not allocate most of your funds into this space. Ensure sufficient diversification of your portfolios. Also do your due diligence before considering the purchase of any power stock.

Check out Equitymaster's power sector report here as well as our editorial on how to find the best power stocks.

Also check out Equitymaster screener on the best power companies in India.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...