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Good old days are back

* NTPC’s coal unit PLF is back to the good old days, with the PLF standing above 80% in Q1FY23. This is the highest Q1 coal PLF since Q1FY17 and was driven by strong power demand in the country. Thermal units across the country have seen an uptick in PLF.

* The role of thermal units continues to be vital now, with thermal generation accounting for 80% of the incremental demand in Q1FY23 compared with Q1FY22. RE/hydro met 18%/3% of the incremental demand in the quarter.

* It is pertinent to note that while H2 of any fiscal year sees lower power demand, thermal generation is higher as hydro and RE generation is weak in that part of the year.

* We maintain Buy on NTPC as the strong power demand should keep the utilization of coal assets high in the medium term. This, along with growth in the RE space, bodes well for the company. After including DPS as part of the calculations, our SoTP value stands at Rs188/share (Rs180 earlier). NTPC is trading at 0.94x FY24E PB with an RoE of ~12%.

Q1FY23 sees strong generation:

In Q1, all India generation was up ~17% YoY and ~4.5% on a 3-year CAGR basis. Thermal/RE generation was up 17.7%/26%. Hydro generation was up 6% YoY. NTPC has outperformed all India thermal generation – up 21% YoY vs. 17.7% of the industry (8.3% vs. 4.2% on a 3-year CAGR basis). Strong demand led to NTPC’s thermal units clocking PLF above 80% in Q1. This is also the highest Q1 coal PLF since Q1FY17.

H2 is seasonally weak in any fiscal:

Typically, peak energy demand in India is 5-8% lower in the second half of any financial year due to the winter, though there are regional differences. Hydro and RE supplies usually see a higher seasonal decline (hydro generation in general is down by ~40% in H2 vs. H1, while RE PLFs are also low in H2 by more than 20%). This results in the need to generate more thermal power. In short, despite low demand, owing to low supply from hydro+RE, higher thermal generation is required in H2. On an average, thermal generation has been higher by ~6% during H2 over H1. The trend is similar for NTPC’s thermal units as well.

Valuation and outlook:

NTPC remains a play on large fossil assets (with robust cash flows), along with strong growth in the RE space. The strong power demand is expected to continue in the medium term, given the strong manufacturing push by the government. NTPC’s stock provides ~5% dividend yield. It is expected to add 3-4GW annually for the next few years (coal and RE combined). It is currently trading at ~0.94x/~0.9x PB on FY24E/FY25E, with an RoE of ~12% and an earnings CAGR of 6-7%. The company is planning to float an IPO or invite a strategic investor for its RE portfolio in FY23/24. Our SoTP value stands at Rs188/share (Rs180 earlier) after factoring in DPS in our target. Risks include a significant slowdown in power demand and any delay in project completion.

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