Based on our recent meetings with NTPC’s management, while there is no new path-breaking catalyst, we sense a bit of a pick-up in the pace of project execution (capacity addition + development of captive coal blocks, which is now being closely monitored by the government) and linkage coal availability remains comfortable. Together with the ebbing risk of material under-recovery of costs under the new tariff regime (as reflected in 9MFY15 financials), improving reported RoE from FY16F onwards and a relatively benign valuation, we remain constructive on the stock.
We trim FY16e/17e EPS by 2% and expect FY15-18e EBITDA/EPS CAGR at 14%/8% (we continue to assume zero returns on capex incurred on the development of captive coal blocks). We believe that an operating return on average regulated equity (RoRE) of 17% on its ex-solar generation capacity is sustainable in the current regulatory regime.
We raise our 12-month target price by 11% to R175. We still prefer Power Grid over NTPC given the former’s superior FY15-18e outlook for earnings growth and reported RoE. The government ’s aggressive disinvestment target for FY16 creates a potential overhang for NTPC.