Tata Power, JSW Energy, Torrent Power: Ambit sees buying opportunity in power stocks after valuation reset

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Fresh power purchase agreements could trigger a new investment cycle, putting select power stocks back in focus.

In its sector outlook, research analysts Satyadeep Jain and Sarthak Jain said electricity demand could grow at around 6% annually through FY32, requiring generation gross block to expand by approximately 11% a year. Limited visibility on power purchase agreements (PPAs) for capacity expected in FY29 and FY30 could prompt distribution companies (DISCOMs) to accelerate procurement over the coming year, potentially triggering another round of project announcements.

“More importantly, the next catalyst may come from contracting rather than near-term demand,” the analysts said, pointing to limited PPA visibility for FY29–FY30 capacity.

Ambit also sees scope for a recovery in utility valuations following the recent correction. With bond yields approaching multi-decade highs, a potential peak in yields could mark a bottom for utility valuations, according to the brokerage.

Tata Power leads Ambit's preferred power stocks

Among its Buy-rated stocks, Ambit ranks Tata Power ahead of JSW Energy, NTPC, Torrent Power and Power Grid, in that order.

For Tata Power, the brokerage has set a target price of Rs 420 per share, based on a discounted cash flow valuation using a 12% cost of equity. The target implies 12.5 times FY28 EBITDA, with Ambit building in 15% compound annual growth in EBITDA through FY27.

The brokerage assumes an Indonesian coal price of USD 85 per tonne on an FOB basis. It also sees potential for additional renewable energy investment opportunities beyond the 18–20 GW of renewable energy capacity factored into its estimates for FY32.

JSW Energy: Contracted renewables and thermal expansion support outlook

JSW Energy is another preferred pick, with a target price of Rs 535 per share, implying 11 times estimated FY27 EBITDA. Ambit expects the company’s FY30 EBITDA to be four times its FY25 level, while profit after tax (PAT) is expected to double over the same period.

The brokerage’s positive outlook is supported by earnings visibility from contracted renewable energy PPAs and thermal capacity expansion, backed by captive boiler, turbine and generator (BTG) capacity.

Key risks include demand growth of 5% or lower, higher renewable energy curtailment and elevated interest rates.

Torrent Power: Thermal expansion, distribution opportunities in focus

Torrent Power offers a different investment proposition, with potential thermal capacity additions and electricity distribution opportunities expected to offset risks to its merchant gas business.

Ambit has set a target price of Rs 1,325 per share, implying 12.8 times estimated FY28 EBITDA. Its assumptions include an EBITDA spread of Rs 1.5–2 per unit on merchant power sales through FY30, at a plant load factor of 20–40% for DGEN.

While battery energy storage systems (BESS) pose a risk to the merchant gas opportunity, the analysts believe additional thermal capacity and potential distribution franchise or licence opportunities could provide meaningful offsets.

A further decline in liquefied natural gas (LNG) prices, analysts said, could also support gas-related earnings, according to the report.

NTPC: Thermal business accounts for Rs 313 of target price

Ambit has a Buy rating on NTPC, with a discounted cash flow-based target price of Rs 395 per share. Of this, Rs 313 per share is attributed to the thermal business, with the remainder assigned to renewables, nuclear, pumped storage projects (PSP), coal mining, flue gas desulphurisation (FGD) and other businesses.

The brokerage identifies lower industry demand growth of 6%, further moderation in BESS prices and delays in commissioning NTPC projects as risks to its outlook.

Power Grid offers valuation support despite order-book challenges

Ambit has a Buy rating on Power Grid and a target price of Rs 285 per share, implying 2.4 times estimated FY27 book value. Its valuation also factors in more than Rs 2 trillion of capitalisation over the next five years.

The brokerage acknowledges that sustaining or growing the existing order book remains a significant challenge. However, it sees value in the existing backlog even without assuming a further material acceleration in project awards. Greater discipline in tariff-based competitive bidding (TBCB) is also highlighted in the report.

NTPC Green: Valuation hinges on capacity growth and returns

Ambit has maintained a Sell rating on NTPC Green, with a target price of Rs 85 per share, based on 10 times FY30 estimated run-rate EBITDA.

The brokerage assumes 9% EBITDA compound annual growth over a 75-year period, with NTPC Green reaching 112 GW of capacity by FY40 and 291 GW by FY50.

Ambit sees potential for renewable energy returns to improve as supply and demand tighten. Lower interest rates could improve equity internal rates of return on existing projects, although new project tariffs would also reflect lower debt costs. The report assumes a 10% market share in renewable energy, supported by low-cost debt and the ability to acquire land.

IEX: Market coupling and transaction fees remain key factors

Ambit has maintained a Sell rating on Indian Energy Exchange (IEX), with a discounted cash flow-based target price of Rs 100 per share. The target implies 15 times FY28 EBITDA and 17.5 times FY28 price-to-earnings.

The report identifies transaction fees and market coupling as key factors affecting the exchange’s business economics. Its stated considerations include the possibility of exchanges maintaining the transaction fee at 2 paise per kWh on each side, IEX retaining market share despite coupling through API integration and technological innovation, and higher-than-expected volume growth in short-term markets.

PPA visibility could drive the next phase of growth

The central theme in Ambit’s outlook is the prospect that future capacity requirements could trigger a fresh wave of power contracting. The brokerage expects DISCOMs to accelerate procurement as limited PPA visibility for FY29–FY30 capacity becomes more pressing.

“Limited PPA visibility for FY29/30 capacity implies DISCOMs need to accelerate procurement in the coming year irrespective of FY28 deficits,” the analysts said.

The potential contracting cycle could support another round of project announcements, creating opportunities for companies positioned to add generation capacity and secure long-term PPAs.

The recent correction has also pushed several utility stocks below Ambit’s target prices, which the brokerage views as an attractive re-entry opportunity.

“Following the recent correction, most utility stocks dropped below our TP, proving an attractive re-entry opportunity,” the analysts said.

Disclosure: This article has been written by Kumar Gaurav, who is not a Sebi-registered Research Analyst or an Investment Adviser. Gaurav and their ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective Sebi-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here