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Company update: NTPC (Outperformer) - Multiple earnings catalysts

We believe the issue of lower availability at NTPC’s recently commissioned power plants (which hurt FY18E earnings) are largely behind us. As a result, we estimate NTPC’s PBT to rise by at least Rs12bn in FY19E (only due to improving availability). We expect a favourable decision on gross caloric value (GCV) issue over next few months, which would boost NTPC’s earnings by 6-8% from base case. We estimate 14% earnings CAGR for NTPC over FY17-FY22E, in line with capacity addition and improved coal availability at its power plants. We reiterate our Outperformer rating on the stock with a target price of Rs200.

Improving PAF to boost earnings: We estimate under recovery of Rs16bn in FY18E, as coal shortage at NTPC’s newly commissioned power plant, accident at Unchhahar and pollution issues at Badarpur hit plant availability factor (PAF) for FY18E. Improvement in coal availability, restart of operations at Unchhahar and likely favorable order by regulator on recovery of capacity charges at Badarpur in FY19E will address these concerns. As a result, we do not expect any further under recovery, causing PBT to rise by at least Rs12bn in FY19E.

GCV issue resolution imminent: The final hearing on GCV is expected in May 2018. NTPC saw 4-5% increase in under recovery on fuel due to change in tariff regulations (in 2014) for FY15–FY19E to measure GCV from firing point to unloading point (refer to Annexure). We expect CERC (the regulator) to provide relief to power generation companies in its final order (as per CEA recommendations).

New policy favourable for NTPC: As per Ministry of Power’s (MoP) new policy, NTPC can schedule renewable power instead of coal power under its existing power purchase agreement (PPA). The benefit to NTPC from the new policy would be to the extent cost of generating renewable energy is lower than the energy charge for the power plant. NTPC will be able to retain 50% of the  difference between energy charge and cost of supply from renewables .

View and valuations

Improving PAF of NTPC’s greenfield power plants and resolution on GCV will address concerns on the company’s earnings growth. Moreover, strong commissioning visibility and consequent 15% CAGR in regulated equity would commensurately enable 14% earnings CAGR over FY18-22E.  NTPC is attractively valued at 12x FY19E earnings, 1.3x FY19E BV and 3% dividend yield. We maintain Outperformer on the stock with a target price of Rs200. Adverse regulation by CERC for tariff period FY20E-24E (especially reduction of RoE due to lower interest rates) could pose a key risk for the stock.