Company update: NTPC (Outperformer) - Benefiting from new tariff regulations
We expect NTPC’s earnings to improve once the new regulations kick in FY20E onwards. Under the new regulations, coal-based generation projects are likely to see 200bps increase in return on equity (ROE), led by allowance of 1) 85Kcal/kg for gross calorific value (GCV) of coal from unloading to firing point, 2) higher O&M expenses and 3) slight relaxation in efficiency and auxiliary consumption norms. In addition, base ROE has been maintained at 15.5% and there is no reduction in equity base for older power plants - a huge positive that addresses major market concerns. With the regulation overhang behind us, reduction in under recovery with improving coal supply and plant availability factor (PAF), and commissioning of projects will drive NTPC’s stock performance. We estimate 14% earnings CAGR for NTPC over FY18-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 Rs190.
New regulation addresses under recovery in fuel charges: 2014 tariff regulations for FY15–FY19E mandated GCV to be measured at unloading point instead of firing point, which led to NTPC facing 6-7% under recovery in fuel costs. With FY20-24E regulations providing an allowance of 85Kcal/kg, we estimate there will be no under recovery in fuel costs, which will lead to 6-7% increase in earnings ceteris paribus.
No reduction in equity base for older assets, No impact on earnings: The draft regulations had proposed upto ~70% reduction in equity base of older power plants (potential 7-8% fall in earnings). However, new regulations have not proposed any reduction in regulated equity for older power plants, resulting in no impact on NTPC’s earnings.
Improving PAF to reduce under recovery of fixed cost: NTPC’s PAF has improved materially in last few months (highest monthly PAF in Feb 2019 at 96%) on better coal availability and improving PAF at the newer power plants. We therefore expect fixed cost under recovery to reduce from Rs11bn in 9MFY19 to Rs7.5bn in FY19E.
View and Valuation
The new regulations are positive, especially for NTPC, as base RoE has been maintained at 15.5%, there is relief on GCV and due to nil reduction in equity base for older power plants. Improving coal supply will lead to lower fixed cost under recovery and address concerns on NTPC’s earnings growth trajectory. Strong commissioning visibility and consequent 14% CAGR in regulated equity will commensurately enable 14% earnings CAGR over FY18-22E. NTPC is attractively valued at 9.8x FY20E earnings, 1.1x FY20E BV and 4% dividend yield. We maintain Outperformer on the stock with a target price of Rs190
NTPC owns and operates power generation plants that supply power to state electricity boards throughout India. Co. also offers consultancy services related to infrastructure sector business such as: Fossil fuel based thermal power plants; Combined cycle power plants; Cogeneration plants; Water supply and treatment and Environment engineering and management. Co. runs a Power Management Institute (PMI), at NOIDA. PMI has over the years trained a number of professionals from Co., State Electricity Boards and other power utilities in the country. Also, participants in PMI programmes have come from various South Asian and Middle Eastern countries.
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