Edelweiss: ‘Maintain ‘buy’ on NTPC with TP of Rs 150

By: |
November 23, 2019 12:30 AM

Taking a cue from NTPC’s superior returns in Koldam, there is ample potential to soup up operational and financial efficiency (e.g. 150bps reduction in Kd).

The project would add 15% to NTPC’s regulated equity base.The project would add 15% to NTPC’s regulated equity base.

NTPC’s acquisition of the Government of India’s stake in Tehri Hydro Development Corporation (THDC) and North Eastern Electric Power Corporation (NEEPCO) is a right strategic step in our view. The acquisitions provide a toehold in renewables with 5GW of capacity (3GW operational); NTPC, hence, avoids low-RoE solar/wind capex.

Taking a cue from NTPC’s superior returns in Koldam, there is ample potential to soup up operational and financial efficiency (e.g. 150bps reduction in Kd).

The project would add 15% to NTPC’s regulated equity base. In our view, the deal is likely to be value-accretive in a base case scenario of INR100bn; watch out for the final valuation though. Maintain ‘BUY’ with a TP of INR150.

Acquisitions provide toehold in renewable with high optional value
The finance ministry has approved the GoI’s 100% stake sale in two power companies — THDC (GOI holding 75%) and NEEPCO (100% GOI holding) — to NTPC. Both companies have aggregate operational capacity of 3GW (2.5GW hydro and 0.5GW gas). Approved regulated equity is about INR60bn (INR30bn each) for both companies. Importantly, about 2GW of hydro capacity is at a relatively advanced stage of completion (about INR20bn in equity already spent). This along with a 1.3GW cost-plus Khurja thermal project (INR110bn project cost) will further boost NTPC’s capacity profile.

We observe that THDC/NEEPCO balance sheets and cash flow profiles are healthy (D/E at 0.4/1.1x and debt/EBTIDA at 2.0/10.0x). THDC’s return profile looks up to mark (superior RoE of 20%+), NEEPCO’s operating performance needs to be enhanced- RoE of about 8% due to its fixed cost under recoveries. Taking a cue from NTPC’s Koldam hydro project (RoE of 20%), we believe NTPC is well equipped to lift NEEPCO’s operating performance via cost rationalisation. Moreover, we estimate NEEPCO can generate additional savings of INR1bn from lower cost of debt (150bps savings at least).

We see the two acquisitions as a strategic fit into NTPC’s big renewable aspirations.

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