Best Power Stocks for Long term Investment

Food and energy are two of the most important resources for the survival and growth of human beings. With the Ukraine war, the importance of these resources has been underlined as the scarcity and increase in prices have led to an economic breakdown of many countries in Africa, Pakistan, Srilanka, and many others. Energy is the basic building block of human society and electricity is the most important form of energy. Ever since electricity was discovered by Thomas Edison, it has played a key role in the growth of the economy and the industry.

India has one of the largest power or electricity industries in the world after the USA and China. The estimated size of the power industry in India is a whopping USD 160 billion or around 14 lakh crores making it one of the biggest. The growth is also rapid with increasing industrialization and per capita income growth which is leading to demand for more electric appliances like ACs, refrigerators, etc. Last year the demand grew by almost 10%. There are subsectors in this industry such as generation assets like thermal, gas, and nuclear power plants, transmission and distribution assets like the wires and substations that move electricity, and finally the most exciting area which is renewable energy which consists of solar and wind energy.

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There are multiple areas that you can invest in power and it is like a recession-proof industry just like food and health. Without energy, nothing would move even for a minute. Also, the good thing is that valuations for most of the stocks in the power sector are also not that high compared to other sectors making it a lucrative place to invest to leverage India’s long-term growth story.

The Nifty Power Index has underperformed over the last 10 years with an annual return of 5% which means that the stocks are not in a good value zone. Another factor is that a lot of the power stocks are PSUs whose valuations are low but have seen a recent upswing in sentiment.

So let us see some of the good stocks in this sector in my view:

PowerGrid which owns almost all of India’s transmission sector is one of the best stocks for the long run given its almost monopoly status, cheap valuation, and future-proof growth as the transmission is crucial for the growth of renewable energy which is set to explode. I have made a detailed video on why you should buy Powergrid. Parag Parikh Fund also recently bought this stock. It has a high free cash flow yield and gives a good dividend of around 5-^% which should increase as most of its capital expenditure has been completed. The company is also expanding into data centers and renewable energy plus building the OSOWOG (one sun one world one grid) which can lead to a huge jump in stock price.

NTPC is one the largest owner of power generation assets in the world and one of the better-run PSUs. It has made heavy investments in renewable energy and plans to come out with an IPO of its RE-focused subsidiary. In the last two years, the price has increased rapidly with its RE growth plans.

Tata Power from the House of Tatas is another excellent company for the long term given its presence across the supply chain in manufacturing, generation, distribution, and transmission. It will also benefit from the privatization of distribution companies where it can gain huge profits as they have a lot of inefficiency. It also has good governance being a Tata company.

CESC which is an RPG Goenka group company is also similar to Tata Power but much smaller in size. However, valuation is cheap, and given its long presence selling power in West Bengal and others can benefit from DISCOM privatization. Though the price has fallen, its valuation is cheap and I think a good value buy for the long term

Torrent Power in Gujarat which is similar to CESC is also diversifying into renewable energy and for long has stable and consistent operations in Gujarat. It has a market cap of around Rs.25000 crores and has given a 22% return over the last year.

The Adani Group also has a number of companies in this sector such as Adani Transmission, Adani Power, and Adani Green Energy but given the controversies and the high valuation of these stocks, I would not currently recommend buying them as the future is highly uncertain for these stocks though they do possess some very good assets in different parts of the supply chain.

Besides these companies, Renew Power which is a pure-play renewable energy developer is listed in the USA. JSW Energy is also similar and after buying Mytrah has a number of solar and wind energy assets though am not sure of its future prospects.

You can also look at REC and PFC which are financing institutions that lend money mostly to power projects. They have low valuations at around 3-4 P/E and high dividend yields. They are not considered by investors because of government ownership which leads to uncertainty but I think the super cheap valuation factors in this risk.

So in summary, the power industry has got a good long runway for growth over the next 15-20 years and many stocks trade at a very cheap valuation. They will not only show good earnings growth but have a high chance of rerating. Investors must look seriously at these stocks for low volatility and high potential returns.