More steam left in NTPC stock; to be key beneficiary of rising power demand

Power demand in summer is liable to spike very sharply due to expectations of higher economic activity and also, projections of high cooling demands since it is expected to be a very hot summer. As India’s largest generator, the public sector undertaking NTPC would be a key player.

Power generation surged 13.8 per cent year-on-year (YoY) in February 2023 after rising 18.4 per cent YoY in January 2023 and 14.3 per cent YoY in December 2022. But power generation fell in February by 6.6 per cent month-on-month (MoM), due to an increase in temperature (leading to lower need for heating).

Overall generation (April 2022 – February 2023) has risen 12.3 per cent YoY for the 2023 calendar year.  Power generation rose 10.4 per cent YoY in the third quarter for the 2022-23 financial year or Q3FY23 (highest quarter in FY23).

The RE (renewable energy) component in overall India generation is also growing. It touched 11.9 per cent in Dec’22, which was 120 basis points (bps) higher YoY.

While the all-India thermal generation growth for January and February 2023 is at 8.7 per cent YoY, NTPC’s thermal generation has grown by 10.8 per cent with average 81.3 per cent PLF (plant load factor) for those two months. NTPC has achieved 90 per cent or higher PLF in the past. So there is an upside.

The PSU has a key advantage in the thermal generation space – it has guaranteed access to Coal India’s supply at controlled prices. Hence, it is almost immune to price fluctuations. It is also likely to be a leader in the solar market, given a strong pipeline of renewables projects and a strong balance sheet, which enables easy capex.

NTPC has placed orders for over 4 gigawatt (Gw) of RE capacity but execution has been slow for various reasons. NTPC is looking to add 17 Gw of capacity (thermal, hydro and RE combined) over the next three years. NTPC intends to tender for 5-6 Gw of coal plants over the next two years.  

NTPC has also transferred 15 RE assets to NTPC Green Energy Limited. The recent consolidation of RE assets and subsidiaries into NTPC Green Energy could enable it to sell a minority stake of 10-20 per cent or to spin off via an initial public offering (the minority stake sale is higher probability). The book value of RE assets is at Rs 10,067 crore and such a stake sale could unlock significant value. Concerns on the ESG front would be addressed as the RE capacity rises.

NTPC has a healthy return on equity (RoE) of 14-15 per cent and a likely revenue compound annual growth rate of 15 per cent through FY25. While receivables from state discoms remains a perpetual issue, the discom total outstanding dues to power generation companies have halved (dropped by 49 per cent) to Rs  58,647 crore in February 2023. This considerably improves the situation for generators with NTPC being a big gainer on this count.

The NTPC stock is up about 8 per cent in a little over a month to Rs 178.35, which is close to its 52-week high of Rs 182.80. Most analysts have a ‘buy’ recommendation on NTPC with target prices in the range between Rs 200 and Rs 205. That’s a reasonable upside given the low risk utility industry model.