Low RoE over long term, risk to earnings from project delays and renewables challenge behind rating.
NTPC has underperformed significantly over the last three-four months. We remain unexcited given (i) modest capacity addition progress, (ii) low ROEs even far out, (iii) risks related to regulatory review, capacity shutdown, (iv) NTPC’s incremental power is costlier than renewable as well as a portion of existing private capacity—this can affect near-term commercialisation as well as medium-term growth given overcapacity. Incremental pipeline beyond bulk tender is thin with only 4 GW ordered in three years (Tanda, Khargone and Ramagundam being last in February 2016). Pudimadaka, Barethi and Katwa are on hold. NTPC has commissioned solar capacity of just 627 MW so far, and visibility beyond that is low.
Marginally reduce earnings by 2/3% for FY18/19e. While FY18 installation and commercialisation guidance seem reasonable, we retain Neutral on (i) low RoE even in the long term, 13-14% in FY20E, capping P/B multiple and upside to our TP, (ii) risk to earnings traction from installation/COD delays, and (iii) renewable scale-up affecting the growth dynamics.
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Capacity growth progress modest; FY18 guidance reasonable
Capacity addition progress remains modest with (i) limited progress on installation and particularly commercialisation (long delays possibly given reluctant customers), (ii) several plants’ second unit is running significantly behind first unit such as in Solapur, Meja, (Solapur II unit is not on the FY18 installation list even though the first unit has been completed in April), (iii) several plants such as North Karanpura have seen limited progress, and (iv) no visibility on Barh I (not on FY18 installation list). Solar capacity addition progress is also slower versus the initial expectation, given that private sector bids are far more aggressive.