This investment is driven by the need to upgrade aging power infrastructure, meet growing energy demand, and achieve the country’s ambitious renewable energy goals, including 500GW of renewable capacity by 2030.
The sector is expected to see around 85% of this capex directed toward power generation, which will play a pivotal role in India’s energy transition.
Power demand in India is projected to accelerate at a 7%+ CAGR, up from the previous estimate of 5%, fueled by new demand drivers such as electric vehicles, data centers, and increased electrification across industries.
This surge in demand highlights the critical need for expanded generation capacity, especially with the country moving from a surplus phase to a potential supply gap.
Over the next five years, India aims to add 250GW of new power generation capacity, with a focus on renewable energy, battery storage, and other supporting infrastructure. This represents a threefold increase compared to the previous five years.Moreover, India’s infrastructure development is set for substantial growth, with investments planned in roads, airports, and logistics, further strengthening the demand for energy.The expansion of transmission and distribution networks, alongside renewable generation, will ensure that India’s power infrastructure can meet future consumption needs efficiently.
The country’s power sector is benefiting from improved asset quality and supportive policy reforms, reducing risks and enhancing financial stability across projects.
Government-backed initiatives and efforts to resolve legacy issues, such as stressed assets, have significantly reduced non-performing assets (NPAs) in the sector.
Additionally, the move toward financing renewable projects and state-backed initiatives ensures a stable flow of capital with lower credit risks.
India’s growing demand for electricity, coupled with its focus on clean energy, presents a bright outlook for the sector.
As power consumption continues to rise, especially with India’s per capita electricity usage still well below the global average, the sector is set for sustained growth and robust returns for investors over the next decade.
REC: Buy| Target Rs 630| LTP Rs 532| Upside 18%
REC is positioned for strong loan growth, expected to achieve an 18% CAGR in its loan book from FY24-27, with renewable energy projects rising from 8% to 38% of its sanction mix.
The company’s diverse exposure across distribution (41%) and generation (28%), along with its focus on renewable projects, sets it up well for growth, targeting 30-35% market share in thermal and 20% in renewables.
Additionally, its strong asset quality and ongoing resolution of stressed assets will likely maintain low credit costs, ensuring steady earnings in the power sector upcycle.
Power Finance Corporation (PFC): Buy| Target Rs 560| LTP Rs 463| Upside 20%
PFC is well-positioned to capitalize on the power sector’s growth, with a projected 15% loan CAGR over FY24-27. Its diverse exposure to power generation, particularly in renewables, and its status as a major public sector financier offers robust lending opportunities.
The resolution of stressed assets will aid in recoveries, ensuring benign credit costs over the next three years. While competition may reduce spreads slightly, PFC’s strong loan growth, improving asset quality, and high earnings predictability make it a stable player in the evolving power finance sector.
(The author is Head – Research, Wealth Management, Motilal Oswal Financial Services Ltd)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)