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RE asset expansion on cards

* In light of the increased focus on climate change and renewable energy (RE), NTPC’s large coal plant fleet has been a matter of concern. However, we believe that the company is poised to benefit from the rapid expansion of its RE portfolio and steady earnings from the existing coal assets.

* NTPC has been very competitive in bidding for the majority of RE projects lately. NTPC has doubled its RE portfolio in the last 18 months, with ~7GW of projects currently either commissioned, under implementation or bid successfully. NTPC has recently won 1.9GW in the auction of CPSU Scheme-II (tranche-III of 5GW). In FY21, NTPC had a 15% market share in RE bids in the country.

* With a better demand scenario, we expect higher utilization of coal assets as RE additions alone cannot fulfil incremental demand. Further, there has been an overall improvement in the performance of key subsidiaries in FY21.

* We maintain Buy on NTPC with a Sept’22 TP of Rs180. We believe that the improving RoE profile and a clear focus on RE will lead to a re-rating. NTPC’s ability to source lowcost debt will enable it to resourcefully attain its RE plan. NTPC is expected to add ~25GW of thermal and RE projects at the group level in the medium term.

* Q2FY22 generation data as of 24 September suggests that while all India generation ex RE has grown by 7.6% YoY with a 3-year CAGR of 3%, NTPC’s generation has seen 10% YoY growth with a 3-year CAGR of 4.3%.

* All set for RE portfolio expansion: NTPC aims to achieve 15GW/60GW of RE capacity by FY24/FY32. It presently has ~7GW of installed/under-construction and bids won in the RE space.

* NTPC has got approval for 4.75GW UMREPP in the Rann of Kutch, with another ~10GW UNREPP in the development pipeline. NTPC has signed an MoU with ONGC to form a joint venture for the development of offshore wind projects. It has also inked a pact with DVC to develop solar plants on DVC reservoirs and land.

* NTPC’s recent success in various solar bids indicates a change in its stance and competitiveness. Management highlights that its bids are backed by low-cost funding and a rigorous process. We believe that NTPC has all the right ingredients to succeed in its RE strategy. It has strengthened the hydro portfolio with the acquisition of THDC and NEEPCO.

* Improving RoE and RE success to lead to a re-rating: RE expansion and improvement in the RoE profile should lead to a re-rating in the stock. In the past five years, the company has traded at an average PB of 1.1x and RoE of sub 11%. With RoEs moving to 12.5%, a re-rating should happen, in our view. Maintain Buy with a Sept’22 TP of Rs180, at an implied P/B multiple of ~1.2x.

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