Given the business model, Covid-19 impact is likely to be negligible; valuations cheapest since they peaked in FY08; ‘Buy’ maintained.
NTPC’s stock has performed in-line (-37.3%) with the NIFTY (-37.5%) in YTDCY20 despite a 20% adjusted profit growth in 9MFY20. With a robust regulated business model, which will be negligibly impacted due to COVID-19 since earnings depend on capacity creation and plant availability (not utilisation/PLF), highest ever annual asset commissioning of 5,290MW in YTDFY20, and significant improvement in coal availability, we expect NTPC’s profitability to improve further in coming quarters. Value-accretive acquisitions (THDC and NEEPCO) and capacity addition (from 56.5GW in FY20 to 115GW in FY30e) leads us to believe that NTPC is on track to maintain strong growth in its core business (14% earnings CAGR over FY19-24, and 12% CAGR over next 10 years).
Despite this growth, the balance sheet will look very strong with D/E less than 2:1. Also, with GoI holding at 51%, further supply of GoI’s share sale seems unlikely. We maintain Buy on NTPC with a TP of Rs 165/share. The stock is trading at its cheapest valuations since its peak of 3.8x P/BV in FY08, at FY22e P/BV of 0.6x (P/E of 4.4x), with an estimated earnings CAGR of 16% over FY19-FY22e.
Decoding the next decade
Impact of COVID-19 on earnings? The impact on earnings is negligible as the business model is very strong with assured regulated RoE. NTPC’s earnings depend on capacity creation and plant availability, not PLF (hence, not linked to power demand). We are confident the next two quarters will remain strong and there will not be any earnings downgrade.
Organic: Company currently has a standalone commercial capacity of 48GW and consolidated capacity of 56.5GW while under construction coal capacity is ~16.5GW which is expected to be commissioned by FY24. NTPC has also announced another 4.5GW of thermal capacity to be added as brownfield capacity. It also aims to add 30GW of renewable capacities by FY30 (10GW by FY24). Hence, by FY30, with organic growth, the installed capacity of the company will be ~108GW. Thus, there is good growth visibility for the next 10 years.
NTPC plans to incur a capex of Rs 2.2 trn over the next 5-7 years, requiring equity investment of Rs 550 bn (over and above the current CWIP of Rs 900 bn). With this, the regulated equity (cost plus assets) of the company will increase from Rs 600 bn in FY19-end to Rs 1,440 bn (on consolidated basis) by FY30e, with additional Rs 240 bn equity invested in renewables. We expect consolidated EPS to grow from Rs 12.2/share to Rs 21.5/share by FY24 and Rs 35/share by FY30 (and assume 50-60% dividend payout annually), implying a 12% CAGR over the next 10 years with more than 8% dividend yield in the next few years.
Inorganic: NTPC is also acquiring GoI’s stake in THDC and NEEPCO which has an installed capacity of over 3GW and under construction capacity of 3.4GW, to be constructed in the next five years. Additionally, NTPC has participated in the NCLT process to acquire 600MW Avantha Jhabua project, which is expected to conclude in FY21. Hence, the installed capacity is expected at 115GW by FY30.