NTPC: Well poised for growth

1 Aug 2023 , 10:48 AM

Recommendation: Buy; Target Price: Rs 250

 

During NTPC’s annual analyst meet, CMD Gurdeep Singh reiterated the company’s goal to reach 60GW RE capacity by FY32 and to continue adding thermal capacity as the need arises. He highlighted the improving sectoral landscape (timely receipt of dues from SEBs, need to add capacity, etc.) and how is NTPC benefitting/ creating value from this opportunity (stepping up coal/RE capacity, NGEL IPO/ demerger, etc.). As such, news flow on CERC regulations will induce volatility to stock prices going ahead. At 9.5x FY25 P/E, the stock is still cheap and continues as analysts of IIFL Capital Services top pick in the sector. 

BUY Strong demand with improving sectoral fundamentals: 

Power demand continues to be strong, on the back of recovery in economic activity, and is outpacing supply. Identifying such a mismatch, CEA estimates a need to add 24GW coal capacity (in addition to 27GW U/C) to meet the power requirement by FY32 as its base case scenario. Government’s policy-level support (RDSS, LPS, smart metering, etc.) has assisted in improving performance of discoms (regular payment to gencos, reducing losses, decline in legacy dues, etc.) and providing relief across the value chain. Albeit, growing power demand with improving sectoral fundamentals bodes well for players across the value chain (gencos, distributors, etc.). 

Creating value on all fronts: 

NTPC is well positioned to benefit from the need to add capacity. As such, management plans to commercialise 10GW/16GW of conventional/RE capacity in the next 3 years and sign PPA’s for an additional 7.2GW coal capacity over the next 12-18 months for ensuring India’s energy security. It is also consolidating its coal mines into a 100% sub, (NTPC Mining Limited), through which it seeks to explore commercial mining options (coal, lignite, etc.). The company plans to expand its RE portfolio (solar, wind, PSHP, C&I, etc.) to 60GW by FY32 (3GW installed till date), and targets a similar return profile like its thermal units for these RE projects. 

Stock is cheap but will be volatile: 

Hereon, news flow on CERC tariff regulations will induce volatility in the stock. While analysts of IIFL Capital Services do not envisage a cut in the regulated RoE, a 100bps change swings PAT by ~5%. Further, updates on the IPO/ demerger of NGEL (RE sub) is also a key trigger. As such, they maintain their 15% p.a. PAT growth through FY23-25, on the back of 6-7GW p.a. cap adds. The stock, though above its trough multiples, still trades cheap at 9.5x FY25 P/E and continues as their top pick in the sector.