NTPC Rating | Buy — Better days lie ahead for the company

By: |
Updated: Jun 03, 2019 2:27 AM

Q4 Ebitda was in line with estimate; under-recoveries expected to fall further; PAT CAGR of 16% likely over FY19-21e; ‘Buy’ retained

NTPC rating, NTPC power demand, NCLT route, renewable energy ,CERC norms, NTPC stock, NTPC, NTPC stock rated buy, Credit Suisse, NTPC's incremental power

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.

Adjustments aplenty
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.

Investment Theme
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.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Avenue Supermarts rating: Hold; Online scale-up a must for future
2Bharat Forge rating: Reduce; Opportunity in defence business is a positive
3Wall Street Week Ahead: Trump-Biden debate could spark stock volatility