Analyst corner: Target price for NTPC revised to Rs 137 from Rs 139 earlier

By: |
August 28, 2020 4:50 AM

NTPC expects FGD systems to be commissioned within the timelines given by the CEA. In this regard, the company has awarded ~59GW of capacity at project cost of Rs 281b. Furthermore, ~5GW of capacity is under tendering and is expected to be awarded soon. Thus, the total cost of FGD implementation is estimated at ~Rs 310b.

RoE could be much lower than the 15.5% that NTPC earns on the capitalization of its projects.

CERC (power regulator) has issued a notification for emission control systems. This pertains to the installation of equipment needed to meet revised emission standards. This notification is largely in the context of the installation of Flue Gas Desulfurization (FGD) systems needed by thermal plants to reduce their SOx emissions. Thermal plants had placed orders for the installation of these FGD systems, which would result in capital expenditure on the same.

The current timeline for FGD implementation is Dec’22.

As per the notification, while the regulated model is in place, CERC has allowed RoE (for the additional capitalization) at an SBI-linked one-year MCLR + 350bps as of 1st Apr of the year of CoD. Furthermore, a ceiling of 14% has been specified. Given the low interest rate scenario, RoE could be much lower than the 15.5% that NTPC earns on the capitalization of its projects.

NTPC expects FGD systems to be commissioned within the timelines given by the CEA. In this regard, the company has awarded ~59GW of capacity at project cost of Rs 281b. Furthermore, ~5GW of capacity is under tendering and is expected to be awarded soon. Thus, the total cost of FGD implementation is estimated at ~Rs 310b.

Moreover, the company has also awarded contracts for 18GW of low NOx combustion systems, but capex remains low (Rs 1.7b). We had built-in FGD-related capitalization over FY21–24 at 15.5% RoE for NTPC. Accordingly, given the current interest scenario, our regulated return expectations have been lowered. We assume 11% RoE on FGD capitalization (~450bps decline).

As of 1st Apr’20, SBI’s one-year MCLR stood at 7.75%, implying RoE of 11.25%. The same would result in 1–2% EPS decline in FY22/FY23E for NTPC; we revise our TP to Rs 137/sh (from Rs 139/share earlier).

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