NTPC likely to see further re-rating

Capacity expansion, focus on renewables, and reasonable valuation key triggers

A sharp increase in power demand has been visible as economic activity revives. After shrinking in 2020-21, GDP is expected to grow 9-10 per cent in 2021-22, according to various estimates. Merchant power is being traded at high rates on the IEX.

All this should be good for power generators. The BSE Power index (which includes capital goods stocks like BHEL, Thermax, and Torrent) and the NSE Energy (which includes stocks like ONGC, Indian Oil, Gail, and Reliance Industries) have moved to new highs.

But the surge in demand has coincided with coal shortages when global prices of coal and natural gas/naphtha are at multi-year highs. Many power plants are holding less than four days of coal stocks, which may mean power shortages. While heavy rains hit coal production and transport in Q2FY22, coal shortages may persist through the next several months.

NTPC can be one of the major beneficiaries of higher demand if it manages its supplies, given captive sources.

Apart from being the largest thermal generator, the PSU and its subsidiaries are rapidly expanding the renewables segment. It is aggressively bidding for renewable energy

(RE) projects.

It has probably increased market share. The Q2 generation data shows allindia generation (exre) grew 7.6 per cent

YOY, while NTPC’S generation grew 10 per cent. NTPC targets expansion of about 25 GW of thermal and RE capacity in the medium term. By 2025, the RE share of NTPC’S group will rise to over 10 per cent of capacity from the current 2 per cent.

NTPC’S revenues are largely locked–in and tied to its equity. It deals largely with state discoms. This means it can’t pass on higher fuel costs unless tariffs are raised by the Electricity Regulatory Commission. As of now, the allowable return on equity is 15.5 per cent in tariff-setting and tariffs are likely to see hikes due to fuel costs.

As much as 12-13 Gw of 66 Gw group capacity is held by subsidiaries. NTPC has consistently delivered higher PLF (plant load factor) at its thermal plants than national averages, usually a spread of 11-12 per cent over the national averaged PLF. Group generation grew 26 per cent YOY in Q1FY22 to 86 billion units, and generation maintained double-digit growth rates in Q2.

NTPC should gain via steady earnings from both thermal assets and RE expansion. It is relatively well-placed in terms of coal supplies. The group Ebitda grew at 10 per cent to ~37,990 crore in FY21 versus ~34,445 crore in FY20. The cost of finance dropped to 6.25 per cent in FY21 versus 8 per cent in FY20.

The valuation may see a re-rating if GDP growth does improve at slated rates, and tariffs rise. Analysts say the RE capacity is under-valued. A sum-of-the-parts analysis suggests the NTPC market cap may be accounted for by its thermal capacity alone. There would be better monetisation of the RE and power trading subsidiaries, if these were spun off through IPOS.

The stock has returned 70 per cent in the past 12 months and over 23 per cent in the past month, outperforming both sector indices, as well as the Nifty50. It also has a significant dividend yield of around 4 per cent, assuming the 2021 payout of ~6.15 per share is maintained.