NTPC: Scaling capacity, growing earnings

19 Apr 2023 , 10:14 AM

Recommendation: Buy

Target Price: Rs 200

NTPC has exited FY23 with 11% generation growth, 66% YoY higher coal production and 3.3 GW capacity addition. While 2.1GW capacity has seen time overruns, visibility on 6-7GW p.a. increase in capacity is strong, given the status of execution. RE capacity adds should improve as the government has relaxed the module sourcing constraints. Given demand-supply mismatch, risk of adverse change in regulations is low; standalone/consolidated earnings should grow 9%/12% through FY25, believe analysts at IIFL Capital Services. 

Strong visibility on capacity additions

NTPC’s three projects (2.1GW), which were to commission in Q4FY23, have seen delay of a quarter given extended trial runs; delay should not affect FY23 financials much. The project pipeline of 17.5GW (10.6GW – Coal, 2.3GW – Hydro, 4.6GW RE) remains strong, and should lead to 6-7GW p.a. capacity addition. NTPC is contemplating to award 10GW thermal plants (brownfield), given the demand-supply mismatch >FY26. Meanwhile, to de-risk its model NTPC is signing PPAs with PSUs and Private entities (eg: 1.3GW contract with Greenko). Operationally, it continues to surprise: 11% generation growth in FY23, on the back of efficiency and seamless fuel supplies.

Steady earnings growth

Analysts at IIFL Capital Services forecast NTPC earnings to grow at 9/12% p.a. on a standalone/consolidated basis, on the back of steady capacity additions, unchanged regulations and continued operational efficiency. Earnings remain insulated to input price volatility, due to its cost plus assured RoE model. Balance sheet remains under-leveraged at 1.6x enabling it to raise credit at cheaper rates and easily fund capex. Further, OCF is expected to exceed capex going forward, which raises the likelihood of a higher dividend payout.

Inexpensive valuations

NTPC has a strong balance sheet and to that extent, any delay in inducting RE investor should not pose a threat on its capex plans. The stock trades cheap at 1.1x FY24 estimated P/BV. With improving capital allocation along with genco favoring sector macro, NTPC is in a sweet spot and set to benefit the most. Further, faster-than-expected economic growth driving demand for power and takeover of stress assets can re-rate the stock. Government’s push to reform SEBs (FY22 losses down 45%) is a key positive at margin. NTPC is IIFL Securiites’ top pick in the Utilities sector for CY23.