NTPC’s April and May 2019 PAF data has seen considerable improvement of 570 bps to over 92.8% YTD — the best in the past 6 years. This is important as Rs 8 bn (7% of PAT) under-recovery in FY19 can be reversed in FY20, and confirms adherence to quarterly PAF norms from next year despite peak summer season demand.
Domestic coal production rose and demand met by hydro/nuclear, leading to a comfortable inventory of 30 days as against 15 days in the past few years. Next key test will be second summer season in Sep-Nov period.
NTPC is well placed to deliver over 15% EPS CAGR v. 5% in past 3 years, leading to 370 bps RoE expansion to >14% on (1) reduced coal under-recovery, (2) debtors days back to normal 35 in Mar’19, (3) 10% CAGR capacity addition over 3 years, (4) favourable regulatory outcome from April 2019, contributing `700-800 crore additional profits in FY20E.
Regulated utilities have an inverse correlation with bond yields, and generally outperform in a declining bond yields scenario. NTPC’s valuations are reasonable at 1.1x FY20E P/B given its historical average of 1.7x and rising EPS growth and RoE profile, along with 5.5% expected dividend yield. We have ‘buy’rating with 21% upside and an attractive dividend yield. Capacity addition is guided for 5.3 GW in FY20. However, there was a delay in FY19 at only 2 GW vs target of 4.1 GW.
Under-recovery halved in FY19 (`740 crore) with better coal availability at Kudgi, Mauda and re-commissioning of accident-hit Unchahar plant.
We expect NTPC’s core RoE to improve by 120 bps in FY20 with `400-crore loss to reverse. Delays in capacity addition, merger or acquisition of other PSUs at unfavorable rates, renewable liabilities from trading arm or receivables delay; and additional technical risk of rising ESG investments.