Why Analysts Are Most Bullish On NTPC Among Peers
A file photo of NTPC’s Badarpur power plant in Delhi. (Photographer: Kuni Takahashi/Bloomberg)

Why Analysts Are Most Bullish On NTPC Among Peers

Analysts are bullish on state-run NTPC Ltd. even as power demand fell in August.

Shares of India’s largest electricity generator have fallen 2 percent so far this year amid mixed returns in the sector. The stock now trades at biggest discount to its historical valuations. But 24 of 26 analysts tracked by Bloomberg retain a ‘Buy’ rating on NTPC with an average 12-month return potential of 28 percent—the highest among peers.

The optimism comes even as power demand contracted 1.6 percent in August. Demand for electricity, however, defied the slowdown in the April-July period, growing 7.3 percent over the previous year. That spurt, despite softening industrial consumption, came largely on the back of demand from households under Prime Minister Narendra Modi’s power-for-all Saubhagya scheme.

According to Murtuza Arsiwalla, senior analyst at Kotak Institutional Equities, short-term fall in demand and plant load factor doesn’t have a bearing on NTPC’s earnings as it has long-term power supply agreements.

Here’s what’s analysts think is going in favour of NTPC:

Cheaper Imported Coal

NTPC has been facing a coal crunch as domestic linkages fell short of the required volumes. The company will be importing coal after four years. What goes in its favour is that the price of coal imported from Indonesia has dropped by almost 39 percent to $65.8 a tonne. That will aid its margins.

Elara Capital, in its note, said improving coal supply from imports, captive mining and a low base of the last financial year will aid earnings.

Fuel Security

NTPC has a signed fuel supply agreement with Coal India for 169 million tonnes of coal per year. And since it buys fuel in large quantity, its cost of coal acquisition is Rs 3.4 per unit compared with Rs 4-5 a unit for private peers, according to Elara Securities.

Falling Underrecoveries

NTPC reported under-recoveries of Rs 800 crore for the year ended March 31. That’s lower than Rs 1,400 crore in the previous fiscal when it had faced fuel shortage at its plants in Kudgi, Karnataka, and Mauda, Maharashtra, while its Unchahar plant in Uttar Pradesh shut down. With the resumption of generation at Unchahar, underrecovery is expected to come down to Rs 200 crore in 2019-20, said Elara Securities.

Capacity Addition

NTPC added 2,180 megawatts of power capacity in 2018-19, taking its total installed capacity to 55 gigawatts, according to its annual report for the last fiscal. The management, in an earnings call after reporting the results for the quarter ended June, said its regulated equity—assets that get assured returns—is estimated to increase to Rs 60,000 crore in 2019-20, and grow at an annualised rate of 15 percent in the next three financial years.

According to Antique Stock Broking, FY20 will mark the beginning of reversal of capital work in progress ratio—a measure of costs incurred on building assets. That will be led by more capacity going onstream, helping the company increase its return on equity in the coming years.

Risks

According to Kotak Securities and Elara Securities, risks to the NTPC stock are:

  • Delay in execution of pipeline projects.
  • Failure to secure timely payments.
  • Non-availability of fuel could impact plant load and availability factors, leading to higher underrecoveries and lower return on equity.
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