NTPC’s Q4FY22 earnings/management commentary reaffirms our thesis of an improving earnings quality with thermal as the mainstay of India’s energy security. Key highlights: i) Q4 PAT a 15% beat despite 70% decline in LPS income – recouping `2-bn fixed cost under-recovery and better realisations. ii) Overdue debtors down 25%. iii) 6GW brownfield thermal expansion on the cards. iv) Targeting 80% growth in captive mines offtake in FY23E (FY22 growth at 30%).

There are significant structural changes that could lead to a gradual re-rating of the stock – energy security, ESG focus, attractive valuations with the RE business at almost negligible valuations and under-ownership in the stock. Maintain ‘Buy’ and top pick status.

Strong bottom-line growth; encouraging guidance
NTPC delivered strong 25% PAT growth in Q4, led by 3-GW plus commercialisation in FY22, apart from recouping Rs 2 bn fixed cost under-recovery (FY22 under recovery at Rs 4.5 bn). Surcharge income (on overdue debtors) declined 75% to Rs 1.6 bn. Management has guided for: i) double-digit growth in Regulated Equity (FY22 growth at 8%) due to accelerated commercialisation. ii) 5GW and 6GW capacity commercialisation in FY23/24E, which includes 1.5/1GW RE. iii) 24MT offtake from its captive mines in FY23E, which could address any fuel security concerns. Management is not perturbed with any significant fixed cost under-recovery in FY23E.

6GW thermal expansion on cards
Given power demand-supply issues, there is a likely revival of medium-long-term PPAs. NTPC is expecting 6GW of brownfield thermal capacity expansion with an estimated capex of Rs 80-100 mn/MW on a regulated basis. It is likely to proceed with 1.3GW soon and expects EC clearance for others shortly. Despite ESG concerns, it does not expect any funding issues. On the RE front, there could be 0.9GW delay in RE commissioning due to BCD/GIB issues.

Outlook: Going strong on all counts
While thermal will remain the backbone of NTPC’s earnings growth trajectory, its transition towards new energy is rolling well. Further, it has restructured its RE business for future strategic sale/IPO, likely in FY23. The stock is trading at an attractive 1x FY24 P/B (RE business almost free). Maintain ‘BUY/SO’ with Rs 194 TP.