NTPC Rating ‘Buy’: Q1 performance was a mixed bag

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New Delhi | Updated: August 7, 2018 1:30:45 AM

Coal imports to rise; CERC norms and NHPC merger are overhangs; stock likely to stay at current level in near term; TP down to Rs 190.

NTPC’s Q1FY19 performance was a mixed bag with 3% beat on EBITDA led by higher tariffs.

NTPC’s Q1FY19 performance was a mixed bag with 3% beat on EBITDA led by higher tariffs. However, fixed cost under- recovery continued to be high—Rs 4.9 bn in Q1FY19 versus Rs 3.0 bn in Q1FY18. We have been highlighting that domestic coal availability is likely to be a big issue and NTPC will have to import coal to recoup fixed cost under-recoveries. NTPC has underperformed the broader market over the past two months by ~10%. And, we envisage it to languish at current level, at least in the near term, due to: a) potential overhang of guidelines on CERC’s FY19-24 norms; and b) unconfirmed reports indicating that NTPC has been asked to buy government’s stake in NHPC on lines of the ONGC-HPCL deal. We estimate NTPC to report 13% EPS growth over FY18-20 riding 8 GW commercialisation. Maintain Buy with revised TP of Rs 190 (earlier Rs 202) as we build in higher RFR, implying exit P/BV of 1.7x.

Generation and tariff drive revenue; 9 months’ COD ask at 5 GW
NTPC reported 14% revenue growth led by 7.5% rise in generation (Kudgi and Solapur commercialised in Q3FY18) and Rs 0.10 tariff rise (partially due to higher cost of debt). Of ~Rs 4.9 bn of under-recoveries, Rs 1.3 bn was on account of coal shortage and others on account of plant shutdown at Unchahar (Rs 1.3 bn), apart from maintenance-related shutdown of 14 GW capacity (Rs 1.5 bn). PAT was flat YoY at Rs 25.8 bn due to lower other income—Rs 1.4 bn versus Rs 8.0 bn in base quarter. During Q1FY19, no capacity was commercialised, implying nine months’ COD at 5GW going by management’s guidance.

Coal imports to rise; CERC norms, NTPC-NHPC merger overhangs
To resolve its fixed cost under-recoveries, the company is likely to resort to imported coal. Moreover, unconfirmed reports of NTPC acquiring NHPC are likely to rile investors given the precedent of the ONGC-HPCL deal wherein the former had to pay a higher price. Also, while CERC’s draft and final guidelines are still some time away, they will remain an overhang.

Outlook: In for long haul
Consensus has still not factored in the abundant inorganic growth opportunities. Favourable outcome of GCV issue and successful implementation of fixed price pooling mechanism are key stock triggers. We maintain ‘BUY/SP’ with TP of Rs 190.

Investment theme
Regulated returns: NTPC currently has ~44 GW of operational capacity under the regulated model with pipeline capacity of ~35 GW plus signed under the regulated model. This enables it to pass on increase in costs.
• High efficiency gains: While the current regulation permits post tax RoE of 15.5%, on regulated equity the company has been able to earn RoE of ~22% on the regulated book.
• Fuel security: The company has secured fuel supplies through FSAs with CIL in the past; incrementally, the coal blocks being developed should improve NTPC’s fuel security.


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