Uncover the secrets behind the electrifying rise of power stocks as we delve into the factors fueling their remarkable surge.
In a surprising twist, power stocks have gone through a remarkable transformation. They have gone from being underperformers to top performers.
To give you an idea, while the Nifty 50 index has given a modest 2.13% return over the past month, the Nifty Energy index has truly shined, delivering an impressive 4.67% return as of September 27, 2023.
The graph shows the outperformance of the Nifty Energy Index over the Nifty 50.
So, the question for today is: what is the reason behind the sudden rally in power stocks and what lies ahead for them?
Let’s begin.
What’s Happening?
Power stocks have truly impressed investors in the past month with some significant returns.
Tata Power has surged by an impressive 6.10%, Adani Power has soared with a remarkable gain of 16.77%, JSW Energy has lit up the market with a stellar return of 24.41%, SJVN has powered ahead with a solid increase of 15.21%, and NTPC has contributed with a notable return of 9.56%, all from August 28 to September 27, 2023.
Why are Power Stocks Rallying?
High Power Demand
Weather plays a big role in our electricity needs, and let’s look at August 31, 2023, as an example. On that day, we hit an all-time high in power demand, reaching over 236 GW. This surpassed the previous record set on August 17, 2023, which was 234 GW; it even exceeded what the power ministry had estimated.
The main reason for this surge in demand was the scorching heat waves of August 2023. When it gets incredibly hot, people use air conditioners, increasing electricity usage.
However, here is the challenge: when there isn’t enough rain, it affects our ability to generate electricity from sources like water-powered generators. So, we have to rely more on thermal power generation. This means burning fossil fuels like coal, natural gas, or oil to produce electricity.
Tapping into the Renewable Energy Sector
The surge in confidence among power stocks can be attributed to two key factors: the rapid expansion of renewable energy (RE) projects and increased capacity utilisation due to strong demand.
Private electricity companies are leading this transformation, significantly investing in renewable energy. Let’s take Tata Power’s subsidiary, Tata Power Renewable Energy, as an example. They recently secured a Power Purchase Agreement (PPA) to build a 12MWp on-site solar project at Tata Motors’ Pune commercial vehicle manufacturing facility. Moreover, they have signed two more power purchase agreements (PPAs) with the Maharashtra State Electricity Distribution Company Ltd (MSEDCL) to develop two solar power projects.
Furthermore, the government’s Production-linked Incentives (PLI) scheme has provided a substantial boost by encouraging the manufacturing of solar modules and energy storage systems.
ESG Investing Trend
According to insights from Moneycontrol, investors eagerly anticipate a rise in power demand, primarily because of the growing adoption of renewable energy sources. International investors are also getting involved, strongly focusing on ESG (Environmental, Social, and Governance) considerations. These considerations prioritise sustainability and responsible practices.
What’s drawing investors to power stocks is not just the potential for capital gains; these stocks also have a reputation for offering attractive dividends. This dividend appeal further solidifies their position as a reliable choice for investors.
What’s Next?
Raj Vyas, VP of Research at Teji Mandi, sees promising signs on the horizon. He notes that the government has recently issued a notification encouraging specific gas-based power plants to operate at their full capacity. This move reinforces the belief that the power demand is expected to remain robust.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The companies mentioned are for information purposes only. This is not an investment advice.
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