CMP, target price, returns and potential gains
On June 22, 2022, NTPC’s share price closed at Rs 137.65/share. The stock over the past month has fallen more than 7.99%. The 52-week low of the stock recorded is Rs 111.95/share on August 26, 2021. While the 52-week high is Rs 166.35/share, recorded on April 19, 2022. The stock is trading at Rs 25.7 higher than its 52 week low and Rs 28.7 lower than its 52 week high.
As far as returns on investment go, the stock has mixed returns. It generated positive returns in 3 months and over 3 months of the investment period. In 3 months it increased by 3.61%, in 3 years it increased by 2.35% and in 5 years it gave 3.92%, respectively. The stock generated the highest returns over 1 year of investment, almost 16.36%. On long-term investment, returns are not promising
Potential earnings – Based on the CMP of the share and the estimated target price of Rs 170/share, NTPC’s share price could see a jump of 24% in 12 months.
Prospects for sustained earnings growth given the regulated RoE model
NTPC has guided the commercialization of 5 GW/6 GW of new capacity in FY23E/FY24E, of which 1.5 GW/0.95 GW will be for RE capacity. Additionally, due to the recent power supply crisis, NTPC plans to add 6 GW of thermal power capacity at an estimated capex of Rs. 60,000 crore in the next 2-3 years. This means that NTPC would have 13-14 GW of thermal power capacity being implemented, which would result in a CAGR of 12% in the self-sustaining regulated equity base in FYs 22-24E and reach Rs. 88,723 crore by FY24E vs. Rs. 70,890 crore in FY22. The regulated pricing model ensures that NTPC will earn a fixed RoE of 15.5% on power project equity and thus provides strong visibility of earnings growth over fiscal years 22-24E.
Focus on renewable energy expansion to drive long-term growth
NTPC has an operational renewable energy portfolio of 1.8 GW, 3.4 GW under construction and 2.8 GW under tender. NTPC expects the ER portfolio to expand to 15GW/60GW by FY26/FY32. Although the transition to cleaner energy will be achieved over the next decade, it is crucial to improving the ESG score and driving the next stage of business growth and re-evaluation. Strong operating cash flow (annual average operating cash flow of Rs 23,887 crore in FY 2018-22) and low cost of debt (5.94% given high credit rating) to help finance investment in RE capacity and generate an adequate IRR.
Potential IPO of NTPC Green Energy to unlock value; Strong cash flow to support dividend payout
The company has established a separate subsidiary NTPC Green Energy Limited and will transfer all renewable energy assets to it after a tax clarification. NTPC plans to monetize renewables through an IPO or the induction of strategic investors and plans to monetize certain assets in FY23. NTPC’s self-sustaining operating cash flow rose sharply by 31% YoY to Rs. 35,388 crore in FY22 and the same is expected to remain strong and therefore we expect sustained high dividend payout (at 42% in FY22 ).
Sharekhan maintains its call to buy with a target price of Rs 170/share
NTPC’s regulated and risk-averse business model provides visibility into earnings growth/improved RoE and the expansion of renewables would lead to a gradual revaluation of the stock as it eases concerns on the ESG front. Additionally, the potential monetization of its RE business could further improve shareholder returns in the years to come. A 0.9x FY24E P/BV valuation is attractive given a steep 39% discount to the historical average 1-year forward P/BV multiple of 1.5x and a healthy dividend yield by about 5%. Therefore, we maintain a long NTPC with an unchanged price target of Rs. 170.
According to Sharekhan, the main risk is that “lower-than-expected commercial capacity additions due to project delays due to COVID-19 and coal availability shortages could affect earnings. Additionally, any write-offs related to discom dues could affect valuations. “
Company Overview – NTPC Ltd
NTPC is a navratna company. It is India’s largest energy conglomerate with roots planted in 1975 to accelerate India’s energy development. Since then, it has established itself as the dominant power major with a presence across the entire power generation business value chain. Starting from fossil fuels, it has made a foray into the production of electricity via hydraulic, nuclear and renewable energy sources. To strengthen its core business, the company has diversified into consulting, training of energy professionals, electricity trading, rural electrification, ash utilization and coal mining. NTPC is ranked second Independent Power Producer (IPP) in the Platts Top 250 Global Energy Company rankings.