Electrification: Theme of the Decade

As humans have evolved from cavemen to modern beings, electricity has been the most significant contributor.

This innovation has led to numerous changes in how the day-to-day activities take place.

As electricity consumption continues to rise, the demand for this innovation is expected to increase.

Due to the persistent demand-supply mismatch, this sector can present a good long-term opportunity for investors to generate returns.

Per capita electricity consumption is expected to increase to 1,824 terawatt hours by FY27.

This is massive compared to the current levels.

With the increase in electrification taking place in the rural part of the country, it won't be a surprise if we see this increase in consumption prior to FY27.

Now, current production levels are not enough to meet demand. The annual demand is outstripping supply by 7.5%.

This mismatch is a sign to remain bullish on this industry.

Power Industry and the Prospects on Offer

India's power sector is one of the most diversified in the world.

India is the third-largest producer and consumer of electricity worldwide, with an installed power capacity of 429.96 GW as of 31 January 2024.

As of 31 January 2024, India's installed renewable energy capacity (including hydro) stood at 182.05 GW, representing 42.3% of the overall installed power capacity.

Solar energy contributed 72.31 GW, followed by 44.95 GW from wind power, 10.26 GW from biomass, 4.99 GW from small hydropower, 0.58 from waste to energy, and 46.93 GW from hydropower.

Power generation in India witnessed its highest growth rate in 30 years by 6.8% in FY23 to 1,452.43 billion (bn) kilowatt-hours (kWh) as of January 2024.

The peak power demand in the country stood at 243.27 GW in January 2024.

Electricity demand in India has increased rapidly and is expected to rise further in the years to come.

To meet the increasing demand for electricity in the country, massive addition to the installed generating capacity is required.

Key Factors Boosting Electrification: EV Charging Infrastructure

The rise in demand for electricity for the purpose of consumption for data centers and EV charging infrastructure can be a significant tailwind for the industry.

Consumers and public and private fleets all need access to charging stations if they are to consider adopting EVs - which include battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs).

While the largest share of EV charging occurs at home, this figure will shift as EV ownership expands to those who can't install a home charger, such as residents of multi-family buildings and/or units that only offer on-street parking.

The demand for on street parking is projected to increase with an increase in the supply of electric vehicles on the road.

Why Data Centers Could Be the Biggest Growth Driver...

When it comes to electrification, data centers have a large and growing impact on electrification expansion.

Data centers are integral to the digital economy, their high energy consumption presents opportunities for the growth of electrification.

Data centers consume a large amount of electricity to power servers, cooling systems, and other infrastructure.

It is estimated that data centers consume about 1% of the world's electricity, a figure that continues to rise with the expansion of digital services.

The demand for reliable and abundant electricity to support data centers can drive the development of electrical infrastructure, including the construction of new power plants, enhancement of grid reliability, and the expansion of power networks, particularly in developing regions.

Through innovations in energy efficiency and increased use of renewable energy, data centers can contribute to a more sustainable and resilient energy future.

Major Players Driving India's Power Sector Growth

#1 Adani Power Ltd

At the top of the list is the largest private thermal power producer in India, Adani Power (APL).

Power produced by its projects is sold by Adani Power and its subsidiaries under a variety of terms, including merchant terms, short-term (Power Purchase Agreement) PPAs, and long-term PPAs.

With nine power facilities located throughout India, the firm now has a 15,250-megawatt (MW) capacity.

The company has strong fundamentals. The last 3 years have seen a 24% compound annual growth rate (CAGR) in its sales.

Improved operating efficiency has allowed net profit to increase at an astounding 3-year CAGR of 153%.

This has resulted in healthy return ratios. The company's 3-year average Return on Equity (RoE)stands at 48% while its 3-year average Return on Capital Employed (RoCE) stands at 21.4%.

Currently, the company is focused on expanding its capacity by 4.8 gigawatts through brownfield expansions at existing facilities.

The company has a P/E ratio of 11.8x, which is much lower than the industry average and that of its peers.

The share price has seen an increase of 152.3 % in past one year. In the last month, the stock has traded flat.

#2 Tata Power Company Ltd

Second on the list is Tata Power Company.

Tata Power is primarily involved in the business of the generation, transmission, and distribution of electricity.

It aims to produce electricity completely through renewable sources.

It also manufactures solar roofs and plans to build 1 lakh EV charging stations by 2025. It is India's largest vertically integrated power company.

It targets to have an order book of more than Rs 2 trillion (tn), by FY30. It's also expecting to implement 4 GW of projects in FY25.

As of March 2024, the company is leading in the market with 86,000 home chargers, 5,500 public chargers, and 900 bus chargers.

The management is confident about doubling revenue, EBITDA, and profit by FY27.

The company has also seen an improvement in their credit rating to AA+.

In the last 3 years, the company has seen a 23% CAGR in its sales. Net profit has increased by a 3-year CAGR of 45%.

The company's 3-year average RoE stands at 11.3% while its 3-year average RoCE stands at 10.8%.

In the last one year, the share price has increased by 107.4%, while over the last month the share has traded flat.

#3 NTPC Ltd

Third on the list is National Thermal Power Corporation (NTPC).

NTPC along with its subsidiaries, associates, and JVs is primarily involved in generation and sale of bulk power to state power utilities.

Other business of the group includes providing consultancy, project management & supervision, energy trading, oil & gas exploration, and coal mining.

The company also plans to award thermal capacity of 16.8 GW in addition to existing projects.

It aims to reach annual production of 50 million tonnes coals from its mines in the upcoming three financial years.

The company's standalone capital expenditure (capex) for next year expected to be close to Rs 227 bn and close to Rs 263 bn in FY26.

The 3-year CAGR growth for revenue and net profit stood at 17% and 19%, respectively.

The average RoE and RoCE for the last three years were 12.4% and 9.2%, respectively.

The one-year return for the company is 105%, while in the past one month the share price has been flat.

#4 Power Grid Corporation of India

Fourth on the list is Power Grid Corporation of India.

It's a Maharatna CPSU and India's largest electric power transmission company.

PGCIL was incorporated to set up extra-high voltage alternating current and high-voltage direct current (HVDC) transmission lines.

The company moves large blocks of power from the central generating agencies and areas that have surplus power to load centers within and across regions.

At the end of Q3 FY24, the company has orders in hand of Rs 7.7 tn.

The management is hopeful that they will achieve more than Rs 1 tn of capex, and in FY25.

The company revenue has grown by a 3-year CAGR of 6%. While the net profit has seen an increase of 17% CAGR, over the past 3 years.

The average RoE and RoCE of the company for the past 3 years have been 19.3% and 9.2%, respectively.

The share price is up 73% in the past one year, while in the past one month it's up 14.9%.

#5 Waaree Renewables Technologies Ltd

Fifth on the list is Waaree Renewables Technologies.

The company is engaged in the business of generation of power through renewable energy sources and provides consultancy services in this regard.

It is one of the largest vertically integrated new energy companies.

It has India's largest solar panel manufacturing capacity of 12 GW at its plants in Chikhli, Surat and Umbergaon in Gujarat.

The topline of waaree has grown by a 3-year CAGR of 307%, while the net profit has seen a massive increase over the last three years of 303% CAGR.

The massive increase in the net profit has reflected in its return ratios. The 3-year average RoCE and RoE stood at 11.8% and 88.3%, respectively.

The stock price has seen a huge growth in past one year of 1,076%. In the last one month the price has decreased by 17%.

Broader Subsectors to Electrification

The theme of electrification is vast, and it was practically difficult for us to shortlist only five stocks worth adding to your watchlist.

Electrification as a theme is as broad as it can get. It includes various sub-sectors under it.

Subsectors include Electricity Generation, Transmission, Distribution, Storage, Retail, Grid Management, Renewable Energy Integration, Transportation Electrification, and more.

You can check out Equitymaster powerful stock screener which has a separate section for each.

Here are the most popular screens:

• Best Power Transmission Stocks in India
• Best Gas Transmission Stocks in India
• Best Smart Meter Stocks in India
• Best Transformer Stocks in India
• Fundamentally Strong Renewable Energy Stocks

Conclusion

Staying up to date with sectoral developments can help investors catch up to the next potential growth story.

Investors can follow the top-down approach to filter out stocks by first screening the sectors with potential.

We recommend using our Equitymaster's screener to find such sectorial growth stories.

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...