During Q2FY20, NTPC’s generation declined by 6.5%, in line with the industry’s decline. Management attributed weaker generation primarily to the tepid economic activity in the country and hence lacklustre demand, apart from strong hydro growth.
NTPC’s Q2FY20 performance reflected the deteriorating financial health of discoms and domestic coal shortage. As a result, receivables (jumped 2x from March 2019) and cash flow (negative FCF in H1FY20) took a hit. However, these metrics have improved subsequently due to the implementation of the letter of credit mechanism. PAT beat estimates by 20% primarily due to high late payment surcharge income of Rs 6.5 bn.
Coal-based under-recoveries (Rs 3 bn in Q2) have resurfaced, but management is confident of recouping the same in ensuing quarters. Finally, commercialisation of capacities has picked up considerably (2.2GW in Q3), which is comforting. Overall, led by higher commercialisation and valuation comfort we maintain Buy with a target price of Rs 150. NTPC remains our top pick in the utilities space.
Weak generation in line with industry
During Q2FY20, NTPC’s generation declined by 6.5%, in line with the industry’s decline. Management attributed weaker generation primarily to the tepid economic activity in the country and hence lacklustre demand, apart from strong hydro growth. Overall, revenue grew 2% led by 5% jump in realisation. NTPC’s reported PAT of Rs 32 bn is 20% higher than our estimate led by higher surcharge income (at 18%) on overdue receivables. This is expected to continue in Q3 as well and decline in Q4.
Under recoveries and receivables key monitorables
Fuel-related disruption at Talcher (both) and Sipat plants led to an overall under-recovery of Rs 3.3 bn in Q2FY20 (Rs 4.5 bn in H1FY20). Management is confident of recouping the same in H2FY20 with overall FY20 under-recovery of Rs 2 bn (our assumption
Rs 4 bn) led by higher imports (4MT) and resumption of normal production at various mines. Trade receivables have shot by 2.3x to Rs 190 bn from March 2019 levels, leading to the deterioration of OCF and FCF. However, post-implementation of the LC mechanism, NTPC has been receiving payments on time; the ~Rs 80 bn plus overdue amount is a cause for concern.
Outlook and valuation: Strong growth ahead; maintain ‘BUY’
NTPC is likely to commercialise ~4GW capacities each in FY20/21, which is likely to drive 15% EPS CAGR over FY19-21. We are slightly concerned over the falling power generation demand. This, apart from the government’s sustained stake sale, is a key monitorable. The stock is trading at an attractive implied P/BV of 1.1x FY21e. We maintain ‘BUY/SO’ with a target price of Rs 150 (25% upside).