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Improving RoE profile to drive rerating

* NTPC is set to add ~14GW of thermal and ~14GW of RE capacity over the next 3-4 years. NTPC has raised its RE target to 60GW by 2032 from 30GW, and we believe given the huge opportunity in the country and low cost of funding for NTPC, the company is set to achieve it.

* Our analysis suggests that coal PLFs have bottomed out considering 5% power demand growth in the country and annual RE addition of 15-30GW over the next decade. Low penetration of durables, various PLI schemes, focus on localization in defense and rising per capita income will all boost demand growth in the medium term.

* We assume coverage on NTPC with a Buy rating and a TP of Rs179, based on SoTP. We estimate RoE in FY21-FY24 to be ~12.5% - 200bps higher than the last 5-year average. We believe that improving RoE profile is one of the most important factors for re-rating in Utilities. We also note that EPS CAGR in FY21-FY24E stands at 8%.

All set to expand RE portfolio:

NTPC has revised its RE target from 30GW to 60GW by 2032. NTPC’s recent success in various solar bids indicates its change in stance and competitiveness. In the years ahead, RE bids should see a lot of participation from large conventional asset players as the majority have geared up for that. Solar plants are far easier in terms of execution and companies with strong balance sheet (ability to fund projects at low cost) and project management skill will flourish. We believe NTPC has all the right ingredients to succeed in its RE strategy. With the acquisition of THDC and NEEPCO, NTPC has strengthened its hydro portfolio. We also believe NTPC will bring in higher efficiency in these companies.

Coal PLFs to not move below current levels with new coal additions taking a back seat:

A majority of private players have refrained from any coal plant expansion. Coal plant additions are near decadal lows with minimal ordering, indicating additions beyond what is current under construction might take a back seat. Our analysis suggests that despite ~15GW RE addition in the next 5 years and 20GW beyond that, coal PLFs will not fall below the current ~55% levels. CEA’s Optimal mix report also highlights ~58% PLF for coal thermal in 2030. Given NTPC units operate 1,200-1,500bps higher than the national average, we do not anticipate PLFs of NTPC coal units to fall below 65-70%. Further, it is important to note that ~62% of its units are linked by MGR/conveyor belt.

Assume coverage with Buy and TP of Rs179:

With a capacity addition of ~14GW underconstruction thermal units and Solar additions, we estimate 8% EPS CAGR for NTPC over FY21-24E with RoE at 12.5% vs. 10.5% in the last 5 years. We believe these factors will lead to a re-rating. Our SoTP stands at Rs179, implying ~1.25x P/B. We believe, NTPC will play an important role even in the RE space given its ability to get low cost funding.

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