Do it yourself

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.

Sustainability has emerged as one of the major investment themes in the post Covid-19 period. Businesses engaged in the activities related to renewable energy and electric mobility have received substantial massive investments and have seen massive rise in capacity building. Nonetheless, the astronomical rise in the stock prices of companies engaged in basic manufacturing like solar PV cells, EV battery modules, electric scooters, etc., may not be sustainable.

This reminds me of my favorite instance from the Hindu mythology. I have narrated this instance many times before. Let me do it again.

“Once the forces of good (gods) and evil (demons) had a protracted battle. The battle lasted so long that both the groups exhausted all their resources and valor. Completely tired, wounded, frustrated and exhausted, they approached the Savior, Lord Vishnu. The Savior advised them to go and explore the great ocean (Sagar Manthan) to find new resources and vigor to make a fresh beginning.

Following the advice, both the groups went to the great ocean and explored it extensively. During their exploration they discovered a huge amount of wealth and resources that included the Amruta (nectar of the gods) that would immortalize its consumer and Vish (venom) that would destroy whoever consumes it.

Realizing that if demons get the access to Amruta and other resources found during the exploration, it would seriously jeopardize the interest of gods, Lord Vishnu tricked demons and appropriated the entire nectar for consumption of gods.

Lord Vishnu also requested Mahadev, Lord Shiva, to absorb the venom so that it does not harm anyone and the balance of the universe is maintained. Obliging, Lord Shiva drank the entire venom and preserved it in his throat.

Post this, gods became more powerful. But whenever they deviated from the path of common good, they were overpowered by demons and dethroned. Each time only after a great deal of repentance they would be rehabilitated with the help of Lord Vishnu, Lord Shiva or the Mother Supreme.

Over the years I have realized that it is not just a mythological story, emphasizing the victory of good over evil, to be heard during religious ceremonies and forgotten immediately thereafter. It is much more. This applies to all aspects of life, even economics.

The ocean exploration mission (Sagar Manthan) is basically a collaborative research effort to find solution to a problem that afflicts all alike, e.g., a prolonged war like World War, a pandemic like plague, smallpox, HIV AIDS or COVID-19, or a major economic crisis like great depression. The experts collaborate to find solutions like vaccines, hygiene products, UNO, Nuclear deterrents, globalized markets, etc. to mitigate the losses and prevent recurrence of such problems.

In modern economic parlance, ocean exploration is akin to the period of recessions followed by irrational exuberance, fiscal and monetary profligacy, and household extravagance.

When all the participants get tired, frustrated and exhausted from a significant economic weakness, collaborative efforts are needed to stimulate the economic activity. At this time all the stakeholders muster courage, and supported by the 'authority', they do things they would not do in normal times. Invariably, this effort involves excessive and seemingly irrational borrowing, investing and spending. Capacities are built to the scale which are unfathomable during normal times. Usually this drives the asset prices to levels that cannot be explained or justified by conventional methods. These unexplained phenomena are generally described as “bubble” in market parlance. The nectar or the good that emerges from these bubbles is shared by all. However, the venom is consumed only by the financial investors who invariably end up poorer after these bubbles burst.

The financial assets' prices correct upon bursting of bubbles but the productive capacities built during the bubble phase stay for long, supporting and promoting growth and development.

If you are not able to correlate to what I am saying - imagine would India be a ITeS superpower without Y2K or technology bubble during late 1990s! Had we built so many houses, roads, malls, power plants, cement plants etc. during the decade of 2000s but for a subprime credit bubble! Would capital be so easily and cheaply available to Indian entrepreneurs without a QE bubble in the west! The capacities built during these bubbles shall continue to support India's growth and development for long, even though the financial investors lost significant fortunes during 2001-02 and 2008-09 burst periods. Most of the entrepreneurs who built large capacities (power plants, roads, ports, airports, mines, steel plants, housing, etc.) ended up bankrupt or financially weaker, but the capacities they created are benefiting the society.

The global shut down due to Covid-19 in 2020 necessitated the latest round of Sagar Manthan (Ocean Exploration). Sustainability became the key theme of development, attracting massive investment, disregarding the sustainability of the investment itself. A bubble-like situation is developing in the sector.

Like the earlier instances, the renewable energy and electric mobility capacities built in this decade will benefit society for long. However, the financial investors who are investing in the companies building these capacities at valuations driven mostly by ‘hope’ and ‘euphoria’ might suffer for long. Mahadev of economy (financial investors) must prepare to absorb vemon, once again.