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Value + able = Valuable
NTPC stock has performed in-line (-37.3%) with the NIFTY (-37.5%) in YTDCY20 despite a 20% adjusted profit growth in 9MFY20. With a robust regulated business model, which will be negligibly impacted due to COVID-19 since earnings depend on capacity creation and plant availability (not utilisation/PLF), highest ever annual asset commissioning of 5,290MW in YTDFY20, and significant improvement in coal availability, we expect NTPC’s profitability to improve further in coming quarters. Value-accretive acquisitions (THDC and NEEPCO) and capacity addition (from 56.5GW in FY20 to 115GW in FY30E) leads us to believe that NTPC is on track to maintain strong growth in its core business (14% earnings CAGR over FY19-24, and 12% CAGR over next 10 years). Despite this growth, the balance sheet will look very strong with D/E less than 2:1. Also, with GoI holding at 51%, further supply of GoI’s share sale seems unlikely. We maintain BUY on NTPC with a target price of Rs165/share. The stock is trading at its cheapest valuations since its peak of 3.8x P/BV in FY08, at FY22E P/BV of 0.6x (P/E of 4.4x), with an estimated earnings CAGR of 16% over FY19-FY22E. Key recent FAQs on the company: Decoding the next decade.
* Impact of COVID-19 on earnings and business model?
The impact on earnings is negligible as the business model is very strong with assured regulated RoE. NTPC’s earnings depend on capacity creation and plant availability, not PLF (hence, not linked to power demand). We are confident the next two quarters will remain strong for the company and there will not be any earnings downgrade.
* Growth prospects?
Organic: Company currently has a standalone commercial capacity of 48GW and consolidated capacity of 56.5GW while under construction coal capacity is ~16.5GW which is expected to be commissioned by FY24. NTPC has also announced another 4.5GW of thermal capacity to be added as brownfield capacity which is over and above the under-construction capacity. It also aims to add 30GW of renewable capacities by FY30 (10GW by FY24). Hence, by FY30, with organic growth, the installed capacity of the company will be ~108GW. Hence, there is good growth visibility for the next 10 years. Capacity addition beyond this will depend on the growth of power demand. However, with NTPC having a large land bank and strong balance sheet, it will remain the leader in the next leg of capacity addition as well. NTPC plans to incur a capex of Rs2.2tn over the next 5-7 years, requiring equity investment of Rs550bn (over and above the current CWIP of Rs900bn). With this, the regulated equity (cost plus assets) of the company will increase from Rs600bn in FY19-end to Rs1440bn (on consolidated basis) by FY30E, with additional Rs240bn equity invested in renewables (mainly solar). We expect consolidated EPS to grow from Rs12.2/share to Rs21.5/share by FY24 and Rs35/share by FY30 (and assume 50-60% dividend payout annually), implying a 12% CAGR over the next 10 years with more than 8% dividend yield in the next few years.
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