NTPC: Reliable, efficient and going Green

23 Mar 2023 , 10:33 AM

Recommendation: Buy

Target Price: Rs 200

NTPC’s cash flows should remain strong, with improving payouts leading to uptick in RoEs. At 8.5x FY24, valuations are inexpensive; NTPC is IIFL Capital Services’ top pick in the sector.

Efficient and reliable energy supplier

NTPC (71GW operational capacity) has 17.6GW project pipeline (coal, hydro, RE) which should commercialize through FY26 at a time when demand is outpacing the supply. It may also eye brownfield expansions (~20GW) and M&A selectively (NCLT). Separately, on the back of best practices in O&M, NTPC has consistently lowered the man/MW ratio by 57% over past 10 years, operated plants well-above the industry average and reined per-unit generation costs. All its units shall be fully compliant on SOx/NOx emission norms by 2026, which reflects its environmental commitment.

Moderate but high-visibility earnings growth

Analysts at IIFL Capital Services expect NTPC to register 9/12% p.a. growth in PAT on standalone/ consolidated through FY23-25, on the back of 6-7GW p.a. cap adds and unchanged regulations. Although moderate, the visibility on earnings growth is high, given its assured RoE model (all costs pass through). By FY25, they see clean energy accounting for 15% of NTPC’s overall generation portfolio. The OCF to exceed capex; as such, balance sheet is under leveraged (D/E of 1.6x). If payout remains high (base case: 50%), RoEs have scope to further expand from 13.4% in base case by FY25ii — up nearly 200 basis points over decadal average.

Top pick

Key risks that envisaged by analysts at IIFL Capital Services are slippages in capacity additions, and worsening of SEB financials. While dilution in benchmark RoE is not envisaged, a 100 basis points change leads to 4% swing in FY25 PAT. At 1.1x FY24 estimated BV and 8.5x FY24 estimated P/E, valuations are inexpensive relative to the defensive revenue model, which insulates earnings in a challenging macro environment. NTPC is IIFL Capital Services’ top pick in the sector. Consistent earnings growth led by capacity additions, should gradually re-rate the stock from its inexpensive valuation multiples.