Company likely to make most of inorganic growth opportunities; CERC norms are an overhang on stock; ‘Buy’ maintained
Our recent interaction with NTPC management inspires confidence that the power sector is gradually recovering, and we believe NTPC is well placed to leverage the opportunity. Key takeaways: (i) elevated power demand (6.5%+ YTD) is likely to sustain on the back of the
government’s 100% electrification drive and an uptick in industrial consumption; (ii) management is also targeting inorganic growth and has an acquisition framework in place to bid for the stressed assets under the NCLT route; (iii) government policy on clubbing renewable energy with thermal will throw up a plethora of opportunities for NTPC in renewable (target 10GW by FY22) at IRRs comparable to thermal; (iv) fuel risk is a big worry for all thermal players – including NTPC – as it leaves them with no option but to import coal and/or ramp up production at captive mines. While CERC norms remain an overhang for the stock, we believe NTPC is in a sweet spot to tap into higher demand growth. Maintain Buy (TP of Rs 190).
Demand here to stay; fuel biggest risk
Improved availability of power in the wake of the government’s push towards 100% electrification and ‘24×7 Power for All’ is driving power demand (up 6.5% YTD y-o-y). Industrial demand – clocking 20% growth in the past two years – is also a key driver. However, coal availability remains the biggest challenge with the possibility of power supply constraints. NTPC is looking to ramp up captive coal production to 40–50 MT over the next four–five years.
Big opportunities in inorganic growth and renewable energy
NTPC is gearing up for inorganic growth opportunities under the NCLT process. Furthermore, NTPC is keen on acquiring state-run hydro player SJVN, which has operational capacity of about 2GW and 1.5GW of under-construction projects. Policy of clubbing renewable energy (RE) with thermal provides a platform for increasing RE portfolio with an initial target of 10GW by FY22.
Growth opportunities aplenty
With a strong balance sheet and PPA pipeline in place, NTPC could be the biggest beneficiary of inorganic opportunities being thrown up under NCLT. This is not being factored in its current valuation in our view. CERC norms remain an overhang in the near term. We maintain ‘BUY/SP’ with a TP of Rs190.
Demand to remain robust: Elevated power demand is likely to sustain. This is being reflected in elevated merchant prices as well. Industrial demand is on the rise with 20% growth in the last two years. Per capita consumption in India at 1,100 units is much lower at one-third of the global average and would inch up going forward.
Renewable a big opportunity: Management remains bullish on the renewable space and NTPC would have 30% of non-fossil fuel-based portfolio by 2032 (overall portfolio –130GW). Formalisation of the policy on clubbing renewables could probably take another 6 months.