Q4 Ebitda was in line with estimate; under-recoveries expected to fall further; PAT CAGR of 16% likely over FY19-21e; ‘Buy’ retained
NTPC reported Q4FY19 replete with adjustments but broadly in line with our Ebitda estimate of `61 bn. Management expects capacity commercialisation of 5 GW at the group level (4.5 GW at Standalone) in FY20 (our estimate: 4 GW) to be spread over the year and not be backended. Having reined in fixed cost under-recovery to `8 bn in FY19 (down from `14 bn in FY18), management is confident it would further trend down in FY20 on the back of better coal supply management aided by a ramp-up in captive coal supply and imports.
We believe high power demand, commercialisation of capacity, recoupment of under-recoveries, etc would lift PAT CAGR to 16% over FY19–21e (flat over FY14–19). Working capital and coal availability are key variables. Maintain Buy with an SoTP-based TP of `158 (23% upside potential) as we roll forward the valuation to September 2020e.
The major adjustments stem from:
(i) change in COD of the Barh plant
(`11/0.6 bn impact on Ebitda/PAT);
(ii) higher other income due to recognition of a late payment surcharge (`8 bn); and (iii) recognition of MAT credit available (net impact of `17.5 bn). This time, the late payment surcharge was majorly recognised in Q4FY19. NTPC has recognised a contingent liability (coal handling infrastructure related) to the tune of `18 bn and `4 bn has been provided for; it remains a key variable for us.
Under-recoveries expected to subside
NTPC recorded a fixed charge under-recovery of `8 bn in FY19 mainly due to the Unchahar shutdown and coal unavailability at the Kudgi and Mauda plants. Resumption of Unchahar unit, additional supply from own mines (5MT ramp-up expected) and higher coal imports (3MT yet to be imported) should rein in under-recoveries meaningfully. Gadarwara-U1 and Lara-U1 are expected to be commercialised in H1FY20, which should add to regulated equity base (`539 bn at end-FY19). Receivables remain a key variable with `76 bn overdue in past 60 days.
Outlook: Improvement in sight
Amid challenging FY18/FY19, NTPC generated lower RoEs of 18% largely due to under-recoveries. We believe RoEs would improve now, driven by higher PAFs/PLFs and CERC 2019–24 norms. Maintain ‘BUY/SO’ with a TP of `158. NTPC remains our top pick given attractive valuation. It is trading at 1.1/1.1x FY20/21e P/B.
Regulated returns: NTPC currently has ~45GW of operational capacity (standalone) under the regulated model with pipeline capacity of ~30-35GW plus signed under the regulated model. This enables it to pass on increase in costs, limiting the impact on profitability.
High efficiency gains: While the current regulation permits post tax RoE of 15.5%, on regulated equity the company has been able to earn RoE of 19-20% on the regulated book due to highly efficient plants and economies of scale.
Inorganic opportunities: Ensuing consolidation in thermal space at attractive valuations provides growth opportunities for NTPC given its scale and PPA pipeline.
Fuel security: The company has secured fuel supplies through FSAs with CIL; incrementally, the coal blocks being developed should improve fuel security.
• Delay in execution of capex: Any delay in execution of pipeline projects could result in downside from the estimated earnings/valuations.
• SEB delays: Failure to secure timely payments is a risk to the working capital cycle and hence earnings.
• Fuel supplies: Fuel non-availability could result in higher than estimated fixed cost under-recoveries.