The back-ended nature of commercialisation (1.7 GW over Feb-March ‘20) means the full benefit of these would be realised in FY21.
NTPC’s FY20 commercialisation at an all-time high sets the tone for FY21 earnings. Amid a nationwide lockdown, India’s power demand has declined 20-25% year-on-year. However, regulated utility companies such as NTPC remain well-insulated from these external conditions. NTPC’s profitability is largely dependent on the ability to operate and declare availability for its plants.
The direct impact of lower power demand/plant utilisation is seen largely in the form of lower PLF incentives (1-2% of earnings). Given the essential nature of power generation, operations continue at NTPC’s plants. Coal stocks at power plants have also increased amid a ramp-up in Coal India’s production and lower power demand, thus reducing risks related to fuel availability. Moreover, NTPC has commercialised 5.3 GW of plants in FY20, the highest ever in a single fiscal.
While an extended countrywide lockdown could impact upcoming commercialisation plans (FY21 guidance: ~5GW), we note: even if we assume no incremental commercialisation, NTPC should register 6-7% earnings growth in FY21 as the full benefit of recent additions flows through. We build in some delays on execution and expect commercialisation of 3.6 GW in FY21. The current stock price implies 0.8x FY21 P/BV, which is at a ~40% discount to its long-term averages. Reiterate our ‘buy’ rating on the stock, with a target price (TP) of Rs 148/share.
The back-ended nature of commercialisation (1.7 GW over Feb-March ‘20) means the full benefit of these would be realised in FY21. We note the recovery of RoE/fixed charges for these plants depend on NTPC’s ability to operate and declare availability. Muted power demand and production ramp-up at Coal India’s mines have resulted in an increase in coal stocks at power plants. This bodes well for NTPC.
As per our interaction with NTPC, the movement of coal through rail or road has not been a challenge. The current low-demand scenario has presented the company with the opportunity to cushion itself from any coal-related supply shocks in the near future.