MOFSL has initiated coverage on the domestic power sector, with 'Buy' ratings on Power Grid, JSW Energy Ltd and and Tata Power Ltd. The brokerage suggested a Neutral rating on NTPC Ltd and India Energy Exchange Ltd (IEX).
In the case of Power Grid, MOFSL said the PSU is a bellwether transmission play with expected dividend yield of 3.5 per cent in FY27. It likes Power Grid as a play on the Rs lakh crore transmission opportunity with limited competition in the more complex HVDC space, where Power Grid already has an established track record.
"Even at 17 times FY27 EPS and 9 times EV/Ebitda, the implied dividend yield is 3.5 per cent, which we believe is attractive," MOFSL said.
In the case of Tata Power. MOFSL said diversified operations and scalability are key growth drivers for the Tata group firm. "Tata Power is undergoing a multi-year business transformation, with 45 per cent of capex over FY23-27 to be allocated to RE projects. This is instrumental in increasing the share of core earnings from 40 per cent to 90 per cent over FY23-27. At 13 times EV/Ebitda (long term average: 10 times), we believe there is scope for further re-rating given lower earnings volatility (vs. history) and strong 14 per cent PAT CAGR in FY24-27," it said.
For NTPC, the NGEL IPO may offer limited upside, MOFSL said. It noted that NTPC’s re-rating in the last two years is attributable to a large extent to its burgeoning renewable energy business, which is on a path to IPO in 1HCY25.
"We value the RE business at Rs 88,000 crore and believe the upside could be largely priced in. Further, we believe the holding company discount after listing is hard to predict and investors may prefer investing in NGEL over NTPC for RE exposure. Lastly, although we are cautiously optimistic on thermal, NTPC, excluding NGEL, is trading at FY27E PB of 1.6 times, which we view as reasonable (and not inexpensive). NTPC’s FY27E dividend yield at 2.6 per cent compares poorly with Power Grid's 3.5 per cent," MOFSL said.
JSW Energy is a case of prudence, execution and growth. Its capacity is set to grow 2.4 times over the next 2.5 years and MOFSL sees a strong likelihood of the company achieving the guided 20GW in installed capacity before 2030, MOFSL said.
JSW Energy's strong execution, ability to turnaround tough assets (Mytrah, Ind-Barath), robust balance sheet and prudent capital allocation for growth are key differentiators against peers, the brokerage said.
Lastly, MOFSL sees IEX as a natural beneficiary of rising power consumption, growth in power infrastructure, launch of new products such as long-dated contracts, and rising FDRE projects. It estimated a compounded annual growth rate of 17 per cent in IEX's volumes and 15 per cent in its profit after tax (PAT) during FY24-27 amid falling power prices, favorable base effect and strong market share.
"We believe the launch of long-dated contracts could add 4 per cent to volumes in the initial year. However, the potential implementation of market coupling is a key regulatory overhang that could dampen IEX's growth prospects given its dominant market share," it said.