Project commissioning augurs well for capitalization
Receding concerns to re-rate stock; Reiterating Buy
Recent rapid commissioning has improved visibility of capitalization
NTPCsa (standalone) capitalization (drives regulated equity and PAT) will pick up pace after a lull period of 3-4 years (from ~1-2GW p.a. over FY14-17 to ~4.7GW in FY18E). NTPCsa has already commissioned ~3.7GW, and plans to commission additional ~2.6GW before the end of FY18. This augurs well for the pipeline of capitalization. NTPCjv (JVs) also targets to capitalize 250MW and commission 660MW. In addition, we expect capitalization of ~1GW solar projects.
Inorganic opportunities – Chhabra progressing, SJVN on cards
The acquisition of 1GW Chhabra thermal power plant in Rajasthan is pending for the transfer of coal linkage, which is expected soon. This will add another INR10b to regulated equity (upside to our numbers). Equity IRR is higher as the gestation period of 3-5 years is saved. The proposed acquisition of SJVN (Not Rated) will improve the share of renewable energy in the mix.
Pooling of tariff can lead to higher PLF incentives
The Ministry of Power is considering a proposal to pool tariff of NTPC plants. This will help in selling un-requisitioned low-cost power from its pit head plants at the cost of high-cost generation in other plants, and thus, save cost to Discoms and perhaps earn some additional PLF incentives for NTPCsa.
Aggressive bidding delaying solar project wins for NTPC
The solar power market has become extremely aggressive on expectation of a decline in panel cost and interest rates. Rapidly falling rates has desisted states from signing PPAs with NTPC. In our view, NTPC is rightly following a cautious approach. The long-term opportunity in solar is huge, and NTPC has competitive advantage in securing debt at lower cost.
Environment norms likely to delay SOxNOx implementation
The new SOx/NOx environment norms for power plants are likely to be delayed to 2023-24 from proposed December 2017, as the rapid increase in mining of limestone (required for SOx) could have an adverse impact.
Expect re-rating on receding concerns about execution and GCV
We expect regulated equity CAGR of ~20% over FY17-20, driven by acceleration in project capitalization. PAT is estimated to grow slower (factoring in RoE decline of 150bp to 14% in the new command period starting 2019), but still accelerate at ~11% CAGR over FY17-20E. Capitalization will start to outpace capex, boosting RoEs. The stock trades attractive 1.2x FY19E P/BV. We expect the stock to get rerated as the two concerns regarding execution and GCV measurements are now largely behind. We value the stock at INR198/share based on DCF. Reiterating Buy.
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