NTPC/PGCIL upgraded to ‘Buy’ with revised TP of Rs 172/213, respectively; valuations are compelling
Draft tariff regulations (2019-24) are positive for regulated utilities as base RoE remains unchanged at 15.5% (our expectation: cut to 14%).
NTPC – positives outscore
Key overhang of cut in RoE is behind company – a major positive. Negative impact of decapitalisation of assets beyond useful life (>25 years) from ‘gross to net basis’ (-1.9% in core RoE) would be offset by positive impact of GCV relief (+1.8% in core RoE). With key benchmarks unchanged, tightening of certain norms (working capital, availability from annual to quarter) would be balanced by relaxation in operating norms. We upgrade NTPC to BUY with revised TP of Rs 172 with regulatory risk overdone and attractive valuations (P/B 1.1x FY20e).
PGCIL – positive on all fronts
With base RoE unchanged at 15.5% and broad benchmarks unchanged, we upgrade PGCIL to BUY with revised TP of Rs 213 given regulatory clarity and compelling valuations (P/B 1.5x FY20e).
Draft policy: key takeaways
Positives outscore for regulated generation companies:Base RoE unchanged at 15.5% came as a positive vs. our expectation of a cut to 14%. Change in methodology for assets which have completed useful life (>25 years) from ‘gross to net basis’ was a negative surprise, as NTPC has ~10 GW of assets which are >25 years old. This clause shall reduce NTPC’s regulated equity by `60-65 bn and hit NTPC’s core RoE by 1.9%. The impact would be offset by positive from relief in GCV (allowance of 85KCal for loss in quality during storage). Relief in GCV norm would incrementally add 1.8% to NTPC’s core RoE.
Tightening of norms (availability on quarterly basis vs. annual currently, working capital, O&M) are balanced by relaxation in few operating norms (auxiliary consumption, incentives etc). We expect NTPC’s earnings to post 13% CAGR over FY18-22. Core RoE to remain at 17-18%. With regulatory overhang now behind company and compelling valuations (P/B of 1.1x FY20), we upgrade NTPC to BUY with revised TP of Rs 172 (vs. Rs 165 earlier).
All positives for regulated transmission companies: Base RoE unchanged at 15.5% and broad benchmarks retained for transmission companies (plant availability at 98%, incentive retained at 98.5%) signal an all-round positive tariff policy for PGCIL. We expect PGCIL’s earnings to post 12% CAGR over FY18-22 and core RoE to remain at 17-17.5%. Upgrade PGCIL to BUY with revised TP of Rs 213 (vs. Rs 197 earlier).