India's power sector has huge potential. Here are four stocks to consider.

The answer, of course, is the power transmission and generation industry.

With the government setting ambitious targets to meet the increasing demand for electricity and support the country’s economic growth, this sector stands at a crossroads.

India's power industry is poised to become a significant exporter of electricity, with existing connections to the grids of Bangladesh, Bhutan, and Nepal, and plans to expand these to other neighbouring nations.

Today we will explore the challenges and opportunities ahead for the Indian power industry, examining initiatives such as the Ujwal Discom Assurance Yojana (UDAY) and the Saubhagya scheme that aim to revolutionise the sector.

We'll also discuss how India has the potential to be a major electricity exporter to its neighbouring countries through some of its top power transmission companies.

Here are four companies in the driver’s seat.

#1 Siemens Ltd

The company offers integrated products, services, and solutions to energy, manufacturing, and process industries.

It operates across the value chain of power, oil and gas, railway, and engineering procurement and construction (EPC) companies. Over the years, it has grown both organically and inorganically.

Over the past five years, Siemens has seen strong growth across all its industries, boosting revenue and profits.

The company's revenue and net profit have grown at a compound annual growth rate (CAGR) of 8.2% and 11.6%, respectively, over the past five years. The net margin has increased from 8.7% to 10% despite high inflation. As a result, the return on equity (RoE) and return on capital employed (RoCE) have also expanded.

Siemens India benefits hugely from the technical support and know-how it receives from its parent company, Siemens AG. Its access to the latest technology, diversified product portfolio, wide geographical reach, and strong demand from user industries will drive the company's performance in the medium term.

#2 CG Power

CG Power, also known as Crompton Greaves Power, is an Indian multinational company that specialises in electrical equipment and engineering solutions.

It provides a wide range of products and services including transformers, switchgear, motors, automation products, and EPC solutions for power transmission and distribution.

In FY24, the switchgear and transformer and railways businesses achieved their highest-ever sales, order inputs and profits.

As a result, the company reported a 45% increase in its unexecuted order book, from ₹4,320 crore on 31 March 2023 to ₹6,270 crore on 31 March 2024.

The company has undergone significant restructuring in recent years and has implemented several strategic initiatives to improve its operational efficiency and profitability.

These efforts have resulted in improved financial performance, reduced debt, and a positive outlook for the company.

#3 KEC International

KEC International is a global infrastructure EPC major with a presence across verticals including power transmission, railways, civil, urban infrastructure and solar.

The company leverages its expertise in transmission tower infrastructure to integrate the Kavach system within railway networks and tracks. In 2023 it won two orders worth ₹600 crore to implement the Kavach system.

Its revenue has grown at a CAGR of 13% in the past five years, while income has declined. Consequently, the net margin has also declined from 20.2% to 4.5%, as have the RoE and RoCE.

Coming to recent developments, management highlighted some concerns about KEC missing out on order inflow targets due to deliberate decisions and renegotiations.

For this year, KEC is targeting around ₹25,000 crore of order inflows and expects a turnaround in the railway business in FY26. It also has an order book of ₹300 crore for its solar business. Though it is not aggressively expanding this segment in FY25, management is confident of winning two to three projects.

In the past year, KEC International’s stock has rallied more than 60%.

#4 Voltamp Transformers

Voltamp Transformer is a manufacturer of oil-filled power and distribution transformers. It has a 15% share of the domestic market, according to management.

Its comprehensive product portfolio is a direct result of technical collaborations with several pioneering companies worldwide.

Over the past five years, it has recorded 14% CAGR in sales, while the bottom line has grown at a 29% CAGR.

The five-year average RoE and RoCE are at 17.2% and 21.1%, respectively.

The company reported a robust order book of ₹1,850 crore for FY24, a 37% increase over the previous year. This indicates strong demand for the company's products and positions it for growth in the coming year.

From FY20 to FY24, net sales and profits clocked a CAGR of 13.3% and 29.3%, respectively. The returns have also been strong, with the five-year average RoCE and RoE at 15.8% and 12.3%, respectively.

Voltamp Transformers is trading at a price-to-earnings (PE) ratio of 41.9, a massive premium over the five-year median of 16.1.

Conclusion

The Indian power transmission industry has substantial growth potential, but not without significant challenges. As the country strives for self-reliance on energy, it must address the increasing demand for electricity and improve the efficiency and reliability of its power grid.

Meeting the ambitious targets for power generation capacity and reducing transmission losses will require concerted efforts and strategic investments. With the right policies and a proactive approach, the sector could indeed prove a pivotal driver of the nation’s economic progress.

However, stakeholders must remain vigilant and adaptable to navigate the complexities of this evolving landscape.

Prospective investors should thoroughly evaluate the risks and opportunities before making any commitments in this industry.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com