Power stocks have been experiencing a significant surge due to a combination of increased demand and government initiatives. Also, they are enjoying favourable market conditions, which makes them an attractive investment opportunity for investors. Let’s see some top reasons causing an increase in their valuation:
1. Increase in CAPEX
As per a recent report, the power sector is expected to see a sharp increase in capital expenditure (CAPEX). Compared to the previous growth cycle, investments are expected to be twice as high. The report also mentions that import restrictions on Chinese goods will:
- Benefit the domestic power value chain
and
- Help local industries grow
Moreover, for renewable energy, the investment required is 2-3 times more than for thermal power plants. This means that renewable energy sources like solar and wind need significantly higher funding to generate the same amount of power as traditional plants.
Such a situation is expected to benefit companies:
- Producing solar modules
and
- Supplying transmission equipment
These companies are also expected to benefit from both domestic and international demand, thanks to the rising focus on renewable energy and export opportunities.
2. Big scope for expansion
Since the entire power sector is in a favourable position, power financiers are likely to see strong growth in their loan books over several years, and that too, with minimal risk of defaults.
It is worth mentioning that India has faced its biggest power shortage in 14 years. This happened mainly due to a drop in hydropower production. Now, to avoid blackouts, companies are delaying maintenance on power plants and restarting idle units. The shortage is also worsened by delays in bringing 3.6 GW of new coal-fired power plants online.
As a result, new announcements and rapid expansions are urgently needed which can surge power stocks significantly.
3. Attractive valuations
India is generally known for trading at a higher valuation compared to its international competitors. Several Indian stocks often cost more than those of similar industries in other countries. However, the power sector stands out as an exception.
Despite their strong growth potential, power stocks in India are priced similarly to the global average, making them relatively affordable. This is notable because, even with a clear outlook for long-term growth, these stocks “have not become overpriced”.
This combination of growth potential and reasonable pricing offers investors an attractive opportunity. Moreover, the power sector is seen as a strong investment option due to a:
- Lower risk of overvaluation
and
- Long growth runway
Hence, we can state that the sector offers a "bull case" and is a good chance for long-term gains due to its reasonable valuations and growth potential.