NTPC stock powers ahead on improving demand, value unlocking in renewables

Expanding capacities, rising volumes and expectations of higher valuation for its renewables subsidiary have boosted sentiment

A surge in the share price of NTPC brings a focus to the power sector and to renewables. The PSU utility has decent 2021-22 results, and it figures to gain volumes in 2022-23 since power demand is directly correlated to economic activity, which is expected to continue recovering. Apart from this general consideration, a recent deal where Tata Power sold an equity stake at record valuations in its renewables subsidiary has indicated that NTPC could receive similarly high valuations in its renewables play.

NTPC ended the fiscal with 69 Gw of capacity (consolidated) adding 3.3 Gw (net) commercial capacity (standalone capacity of 55 Gw). Renewable capacity addition of 502 Mw pushed renewables plus hydro to 8.1 per cent of total installed capacity. The target is to reach 60 Gw of green capacity, (40 per cent of total capacity) by 2031-32. Of this, NTPC hopes to add 16.5 Gw of renewable energy (RE) by 2026-27. Apart from bidding aggressively for RE projects, the group is adding both 3 Gw of battery storage capacity as well as floating a Request for Proposal for solar module manufacture.

Generation for the group increased by 14 per cent to 360 billion units (BU) in FY 2021-22. Thermal generation (coal) saw plant load factors (PLFs) of 70-71 per cent, which is the highest since 2018-19. The NTPC group has 16 Gw of capacity under construction, including 2.8 Gw of RE projects and 10.6 Gw of coal-based thermal. The total gas/hydro/RE capacity is at 12 Gw, which is 17.5 per cent of total capacity. The capex target for 2021-22 was Rs 23,700 crore, and a capex of Rs 22,500 crore is targeted for this fiscal. Approximately 40 per cent of capex is for RE.

Peak power rates on exchanges hit Rs 20 per unit in March, and this indicates that there will be likely pressure to generate more thermal, and ideally improve PLF, since thermal is the easiest ramp-up at short notice to meet peak demand. The standalone entity’s regulated equity, which has a direct bearing on profits, would be held at around Rs 68,700 crore in 2021-22 and it will reach Rs 93,500 crore by 2023-24.

The drawdowns during the first half of 2021-22 came due to the Second Wave and in the Second Half, both coal and gas prices spiked. Effectively gas capacity is unprofitable at these prices, and PLF for gas hovered below 22 per cent for the second half. The prices remain high but NTPC has pass through tariffs on much of the coal thermal production, and it is receiving coal at a fixed price from Coal India. So coal price rises are largely neutralised.

Market watchers are also looking at the BlackRock deal (along with UAE-based co-investor Mubadala sovereign fund) to buy into TPREL, the fully owned RE subsidiary of Tata Power. The implied valuation was Rs 109 per share with an Enterprise Value of Rs 50,000 crore. BlackRock (along with co-investor) will invest Rs 4,000 crore for a stake of between 9.75-11.4 per cent.  Although the market was hoping for higher valuations, this itself is a new benchmark. Applying similar metrics, the Enterprise Value of NTPC Green Energy Limited subsidiary and other RE capacities rises.

The NTPC stock is now trading at Rs 163.75 which is a return of 24 per cent in the last month and a return of 62.6 per cent in the last year. One brokerage has a target of Rs 196 based on sum-of-the-parts valuations.