Strong earnings visibility for NTPC amid growing power demand in India

Given the steady increase in electricity demand, estimated to grow annually by 7 per cent over 2023-30, NTPC is a bellwether for the power sector. The state-owned electricity giant is by far India’s biggest power generator. It supplies power to every state and union territory and has a presence across thermal, hydro, pumped hydro, and renewables.

The financial health of NTPC depends on being paid in a timely fashion by downstream consumers such as state electricity boards, as well as having adequate access to coal from suppliers like Coal India (and via imports and through its own captive sources).

The share of electricity usage in energy has risen from 14 per cent in 2010 to 18 per cent in 2019 and should hit 23 per cent with the usage of electric vehicles, electric cooking, air-conditioners and the establishment of data centres.

NTPC must find the resources to implement large capacity expansions. Thermal plants take 4-5 years to go operational and renewable energy (RE) takes 12-24 months. Deficits at peak demand are likely to continue for the next four years.

NTPC’s thermal generation is up 34 per cent year-on-year (Y-o-Y) in October 2023 and roughly 90 per cent of its generation mix is thermal with 74GW total rated capacity at a consolidated level.

But it targets high growth in the non-fossil portfolio (hydro, nuclear and RE) to contribute 67GW of the total capacity of 130GW by 2032. Currently, RE capacity is just 3.3 GW, implying massive capex acceleration.

In H1FY24, NTPC added 1.5 GW of commercial capacity, of which 110MW (0.1GW) was RE. In H2FY24, NTPC aims to add 2GW thermal capacity. It has planned 16GW renewable and 10GW conventional capacity for the next three years. This is in addition to the 10GW thermal capacity already under construction.

The project pipeline is operating smoothly. The RE capacity addition would mean a capitalisation of Rs 85,000-90,000 crore by FY26. Along with RE capacity, focus on areas like green hydrogen, battery storage would diversify revenue streams, improve ESG rating and add to earnings. If the RE business is spun off in an IPO, that could conceivably unlock greater value.

Revenue (standalone) declined marginally by 0.3 per cent to Rs 40,900 crore in Q2FY24. The average tariff realisation for H1FY24 declined 3.4 per cent Y-o-Y to Rs 4.61 per unit. The Ebitda rose 11 per cent Y-o-Y to Rs 10,500 crore, with operating margin rising to 26 per cent in Q2FY24 versus 23 per cent in Q2FY23. Reported PAT rose 17 per cent Y-o-Y to Rs 3,900 crore, adjusted PAT dipped 3 per cent Y-o-Y to Rs 3,500 crore on a rise in fixed-cost under-recovery to Rs 381 crore in Q2FY24.

Every upcoming review of power tariff regulations must be monitored closely. But big changes in regulated RoE of 15.5 per cent for generation companies are considered unlikely given the power ministry target of adding 80GW of thermal capacities.

There’s good earnings visibility for NTPC given strong growth with estimates of 11 per cent PAT CAGR over FY23-FY26 – note that the regulated equity base would grow substantially due to capex.  

The downside risks include lower-than-expected commercial capacity additions if there are project delays and coal shortages. Aggressive tariff bidding in RE could reduce returns too. Write-offs due to high receivables from discoms, or higher working capital requirements may affect valuations. The consensus though is for steady returns with some analysts offering valuations of Rs 300 a share.