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MOSL: NTPC (Buy)-One-off income dilutes the impact of under-recoveries-Capitalization to drive strong PAT growth

NTPC: One-off income dilutes the impact of under-recoveries; Capitalization to drive strong PAT growth; Maintain Buy

(NTPC IN, Mkt Cap USD18.9b, CMP INR168, TP INR195, 16% Upside, Buy)

 

We analyzed NTPC's FY18 annual report. Key highlights:

• Under-recoveries in fixed charge and employee cost led to ~9% decline in NTPC standalone's (NTPCsa) core PAT, as against an increase of ~16% in regulated equity in FY18. However, reported PAT was up ~10% YoY to INR103b, supported by prior-year items, provision reversal and one-off gains.
• Core RoE declined ~300bp YoY to ~17% in FY18. Excluding under-recovery in fixed charge and employee cost, core RoE stood at ~20% (unchanged YoY). Underlying RoE (i.e., including equity invested as working capital) declined ~300bp YoY to ~12% in FY18.
• NTPCsa's working capital days increased from 74 to 91 days of revenue in FY18, driven by advance freight paid to railways (INR50b) and higher unbilled revenue. We expect some working capital borrowings in the next few years as incremental equity will be used to fund capex. This, in our view, will impact working capital incentive income.
• NTPCsa capex (according to the balance sheet) stood at INR264b, but cash capex was lower at ~INR180b in FY18. NTPC continues squeezing project creditors (~INR52b in FY17 to ~INR91b in FY18) to fund part of capex.