NTPC: Improved earnings visibility boosts sentiment for attractive stock

Rising capitalisation may drive regulated equity returns

The NTPC stock has surged almost 9 per cent since its June quarter results were announced a few days back. While this was positive, it's the improving earnings visibility that is boosting sentiment for the attractively valued stock.

The company commercialised 660 megawatt (Mw) capacity during Q1FY21, taking its total standalone commercial capacity to 50.4 gigawatt (Gw). 

For FY21, analysts at Emkay Research expect 4.8 Gw of capacity to achieve commercialisation, followed by another 5.4 Gw in FY22. NTPC had already commercialised 5.3 Gw capacity for FY20 — the highest in a single financial year.

Analysts at Motilal Oswal Institutional Equities say with the company guiding for 5–6 Gw per annum capitalisation for the next three to four years, they expect regulated equity to grow at 11 per cent per annum over FY20-23 and will boost return on equity (120 basis points accretion). The regulated equity had seen a 14.5 per cent year-on-year (YoY) growth during FY20. The rising regulated equity bodes well since the company earns a fixed return on the capital (equity) employed in the business, irrespective of demand and flow of power.

With capitalisation gaining pace, which should drive regulated equity, the concerns on fixed cost under recoveries are easing. 

 

 

Improvement in coal supply and higher coal imports during FY20 had led to fixed cost under recovery at Rs 250 crore, against Rs 790 crore in FY19. Notably there was no fixed cost under recovery in Q1FY21, as plant availability factors (PAF) improved with much-better coal stocks at power plants.

It was the fixed cost recovery that drove the June quarter operating performance despite revenues declining because of weak electricity demand. Despite 3 per cent YoY decline in revenues at the standalone level (excluding joint venture and others), the company’s Ebitda surged 20 per cent YoY. The company’s thermal-fired generations saw PAF improve to 95.76 per cent, from 91.06 per cent in the June 2019 quarter.

Notably, electricity demand has improved after easing of the lockdown; with PFC/REC to support state distribution companies, the collection of dues should further improve.  

What’s more, the company now plans on focusing more on renewable capacities, and after completing ongoing projects, there may not be many new thermal projects. The renewable capacities are expected to rise to 24 per cent of total by 2032, from less than 2 per cent currently. Thermal capacities have a long gestation period and any change in strategy will mean lower capex requirement.

Analysts, such as Rupesh Sankhe at Elara Capital, say in terms of valuation, NTPC is trading at a historically low valuation of 0.7 times FY22 price-to-book value, which looks attractive. Motilal Oswal Research expects 9 per cent annual growth in earnings over FY20–23. Dividend yield of 5-6 per cent is an added advantage, say analysts.