Further re-rating likely for NTPC stock: Here are a few possible triggers

Capacity expansion, high operational efficiency, focus on renewables and reasonable valuation are triggers

A sharp increase in power demand has been visible as economic activity revives. After shrinking in 2020-21, GDP is expected to grow by 9-10 per cent in 2021-22 according to various estimates. Merchant power is being traded at high rates on the IEX.

All this should be good for power generators. The BSE Power Index (which includes Capital Goods stocks like BHEL, Thermax and Torrent) and NSE Energy (which includes stocks like ONGC, Indian Oil, Gail and Reliance Industries) have moved to new highs.

But surge in demand has coincided with coal shortages, when global prices of coal and natural gas/ naphtha are at multi-year highs. Many power plants are holding less than four days of coal stocks, which may mean power shortages. While heavy rains hit coal production and transport in Q2FY22, coal shortages may persist through the next several months.

NTPC could be one of the major beneficiaries of higher demand if it can manage its supplies, given captive sources. Apart from being the largest thermal generator, the PSU and its group is also rapidly expanding the Renewables segment. It is aggressively bidding for renewable energy (RE) projects.

It has probably increased market share. The Q2 generation data shows all India generation (ex-RE) grew 7.6 per cent YoY, while NTPC’s generation has 10 per cent growth. NTPC targets expansion of about 25 GW of thermal and RE capacity in the medium term. By 2025, the RE share of NTPC’s group will rise to over 10 per cent of capacity from the current 2 per cent.  

NTPC’s revenues are largely locked–in and tied to its equity. It deals largely with state discoms. This means it can’t pass on higher fuel costs unless tariffs are raised by Electricity Regulatory Commissions. As of now, allowable Return on Equity is 15.5 per cent in tariff-setting and tariffs are likely to see hikes due to fuel costs.

About 12-13 GW of its 66 GW group capacity is held by subsidiaries. NTPC has consistently delivered higher PLF (plant load factor) at its thermal plants compared to national averages, usually a spread of 11-12 per cent over the national averaged PLF. Group generation grew 26 per cent YoY in Q1FY22 at 86 billion units, and generation maintained double-digit growth rates in Q2.

NTPC should gain via steady earnings from both thermal assets and RE expansion. It is relatively well-placed in terms of coal supplies. The group Ebitda grew at 10 per cent to Rs 37,990 crore in FY21 versus Rs 34,445 crore in FY20. The cost of finance dropped to 6.25 per cent in 2020-21 versus 8 per cent in 2019-20.

Valuations could see a re-rating if GDP growth does improve at slated rates, and tariffs rise. Analysts say the RE capacity is under-valued. A sum-of-the-parts analysis suggests NTPC market cap could be accounted for by its thermal capacity alone. There would be better monetisation of the RE and power trading subsidiaries, if these were spun off through IPOs.

The stock has returned 70 per cent in the last 12 months and over 23 per cent in the last month. This has beaten both the sector indices and the Nifty 50 as well. It also has a significant dividend yield of around 4 per cent assuming 2021 payout of Rs 6.15 per share is maintained.