Analyst Corner: Maintain ‘buy’ on NTPC with target price of Rs 158

At its annual analyst meet, the NTPC top management exuded confidence about: Reversal of the CWIP ratio to 20% over the next three years (from 42% currently) led by higher capacity commercialisation; Rs 80,000 crore regulated equity by FY22E, implying a 15% CAGR; aggressive stance in adding renewable energy (RE) capacity under various modes (PPA, merchant, flexi generation, etc), which would earn at least regulated returns, if not higher; and ramping up captive coal mines and that higher ACQ would preclude fuel-based under-recovery. The government’s divestment plans through stake sale/expensive merger remains the key risk. Maintain ‘Buy’ with an SoTP-based TP of Rs 158 backed by a 15% CAGR in EPS and RoE improvement by 150 bps over FY19–21E, and an attractive 1.1x P/BV on FY21E earnings.

Bucking the previous few years’ trend, the management expects a reversal in the CWIP ratio with 5GW capacity commercialisation annually over the next few years. The CWIP to fixed assets ratio is expected to fall off to 20% by FY22E from about 42% currently. The management highlighted this could drive a 15% CAGR in regulated equity over the next three years, aiding RoE expansion as projects start earning returns. FY20 regulated equity is expected to touch Rs 60,000 crore (Rs 53,000 crore currently) with about 5GW of capacity commercialisation target in FY20.

The renewable trend seems to be catching up with NTPC, and it is aggressively targeting RE capacity additions through EPC/developer mode, etc. Furthermore, the company has been participating in various TBCB bids. The management broke down the Rs 400 crore impact on profitability in Q1FY20 results into largely: a) Rs 150 crore impact on account of amendment in Deviation Settlement Mechanism (DSM) regulation; b) Rs 40 crore related to Bhadarpur TPP; and c) a Rs 6-crore decline in other operating income. The Management highlighted that the DSM issue has been rectified and is unlikely to recur.

NTPC Limited