We met with Gurdeep Singh, CMD of NTPC. Key takeaways: (i) Remains confident of eliminating entire under-recovery in FY20 (7% of FY19 PAT); (ii) sweating existing land bank to develop solar portfolio at competitive tariffs, with low-cost funding; (iii) unlocking cost efficiencies through National Merit Order (NMoD) with gains sharing, while being protected for non pit-head plants under Grid-code norms; (iv) balance sheet to remain protected from solar PPAs through NVVN.
We remain positive on NTPC and believe it can deliver upwards of 20% EPS growth in near term (H1FY20) and 15% EPS CAGR over FY19-22e, levitating the core RoE to 22% and company RoE to 14%. This would be led by (i) reduced coal under-recovery, (ii) debtors days back to normal 35 in Mar’19, (iii) 10% CAGR capacity addition over 3 years, (iv) favourable regulatory outcome from 1-Apr’19, contributing Rs 7-8 bn from GCV relief.
Where can we go wrong?
Premium acquisitions: Company buyout or acquisition of assets above the book value or at a significant premium to CMP could lead to dilution in RoE. Aggressive bidding for RE projects: Aggressive RE bidding could dilute RoE of conventional power business. While RE projects may be at similar equity IRRs with coal given the short gestation period, the terminal RoE gets impacted, and thus the valuation of the company.
FGD capex RoE and opex cost pass-through makes NTPC’s plants more expensive vis-à-vis IPPs which haven’t started implementation yet. Should NTPC get into disadvantage despite being early compliant, it could impact offtake and financial assumptions—like the railways advances which led to savings on variable cost for consumers, but interest cost is borne by the company shareholders.
We expect NTPC to report over 20% y-o-y PAT growth in Q1FY20 We expect NTPC to report over 20% y-o-y PAT growth in Q1FY20, aided by reversal of under-recovery on coal, plant outage and benefit of GCV relief. Impact of reduction in regulated equity for older plants to be minimal as closure of older plants to be more gradual. Expect core RoE to improve by 240 bps y-o-y to 22.1%.