One sector that is inflicting extreme pain to the investors in Indian equity is ‘power'. The stock prices of almost all companies present in the power sector value chain have corrected 25-50% from their 2024 high levels. The correction in stock prices has been particularly pronounced after the declaration of ‘energy emergency’ by the president of the United States.
In my view there are three factors responsible for this correction, viz., technical, fundamental and sentimental.
Technical: The stocks of companies in the power sector value chain had seen a sharp runup in the past three years. Reasons for enhanced investor’s interest in the sector was underperformance of a few years showing bottom formation on charts; exciting announcements by the government relating to the sector; state electricity board reforms to reduce transmission & distribution losses; power demand growth picking up; and electric mobility and climate control commitment of several governments etc. The enhanced investor interest however took the stock prices quickly into the bubble territory. The stock prices are now correcting to more reasonable levels.
Remember, stock prices usually follow the laws of physics. A pendulum that swings to the extreme right (bubble), never stops immediately at a neutral position. It usually travels the equal distance to the left (distress); then makes some small moves on either side (greed and fear) before settling to a neutral position.
In my view, technically speaking, we may complete the left swing in the next couple of months, and achieve full mean reversion by the summer of 2025.
Fundamental: Enthused by a technical rally, analysts had started translating political promises into numbers and extrapolating these numbers to perpetuity to arrive at fancy valuations. An extended monsoon and a mild winter have resulted in lower power demand in 3QFY25. Some analysts are using this opportunity to correct their highly optimistic projections. Some are also using the pretext of the latest Chinese AI model (DeepSeek) to moderate their electricity and power equipment demand forecast; arguing that the demand for new data centers may be much less than previously estimated.
In my view, power demand growth in India is a function of rising affordability for fans, lights, refrigerators and air conditioners; rising popularity of EVs; more metro rail projects and new electrified rail routes; urbanization; depleting water tables requiring electricity to fetch water from ground; etc. There could be some seasonal slowdown, but structurally demand is set to rise materially over the next couple of decades.
Explosion in data center demand so far has mostly been a spreadsheet phenomenon. Further, assuming that India and other governments allow China to have access to their data through DeepSeek, is also a little far-fetched to me. DeepSeek is just another development (though very significant) in the global technology transition. It will only accelerate the adoption of AI by governments and businesses and trigger a fresh wave of development in the field of AI, using cheaper resources and methods. The impact on the power sector value chain could only be positive.
Sentimental: An energy emergency declared by President Trump has introduced a fair degree of uncertainty in respect of fiscal support to clean energy. This has made investors fearful of the massive investments made in the development of the clean energy ecosystem being rendered useless.
I am not sure if serious investors and responsible states would agree with the President’s outright rejection of climate concerns; and revert back to fossil fuels.
Moreover, in countries like India, where clean energy is not
only a medium for climate control, but also a critical resource for achieving
energy security and financial stability. Losing focus on development of a
strong renewable energy generation base is not an option for us. For context, out
of 34GW total capacity added in the year 2024, about 85% was renewables.
Solar project constituted ~72% (24.5GW) of the total new capacity addition;
with solar contributing 10%. The present project pipeline indicates about 50GW
renewable capacity addition during FY25 and FY26.
Power sector value chain (generation, transmission, distribution, and consumption) is indubitably one of the decadal investment themes in India. However, to make money, investors need to follow strict discipline and not be unduly influenced by the forces of greed and fear.
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