Brokerages bullish on this power stock, expect robust regulated equity growth in 2020

Global brokerage houses remained bullish on NTPC, the country's biggest power generator, amid likely outperformance in 2020 backed by robust renewable energy growth.

The stock has been largely rangebound in last 10 years and has corrected about 35 percent. It touched an all-time high of Rs 242.50 in January 2008, when subprime crisis had begun to unravel in the United States.

On February 19, it was quoting at Rs 113.40, up Rs 3.70, or 3.37 percent, on the BSE at 0930 hours.

While maintaining a “buy” call on the stock, with a price target of Rs 157 (implying a 43.1 percent potential upside), CLSA said it expects NTPC to see a growth of 14 percent in regulated equity over FY20-23.

"It should achieve double-digit YoY regulated equity growth by Q4 and the regulated equity growth is likely to be 34 percent over FY20-22," it said.

According to the brokerage house, markets are likely to look at fundamentals which have improved. Hence, the stock can outperform in 2020 as it has robust regulated equity growth.

ICICI Securities also maintained its buy call, with the target price at Rs 165 per share (implying a 50 percent potential upside). It also expects the regulated equity in the next five years to double from Rs 52,400 crore at the end of FY19 (regulated equity at Q3-end was Rs 56,570 crore, up 8.6 percent YoY) on account of the following:

With the increase in regulated equity by Rs 4,500 crore in the last 12 months, core earnings witnessed significant improvement. Core return on equity (RoE) was at 19.7 percent for 9MFY20, up 170bps YoY, pointing to substantial improvement in operating performance, which was also visible from the decline in fixed-cost under-recovery.

NTPC's plant availability factor improved 304bps YoY at 88.3 percent despite issues at pithead plants, resulting in improvement in fixed-cost under-recovery at Q3FY20-end to Rs 380 crore (versus Rs 450 crore in Q2).

ICICI Securities expects this to further decline to below Rs 200 crore by FY20-end.

"Q3FY20 core growth, capacity addition (both thermal and renewable), green initiatives (FGD, low-NOx system installation) and acquisition pipeline gives us sufficient confidence that NTPC’s core business can only gain further strength with 17 percent CAGR over FY19-FY22E," the brokerage said.

It feels an additional positive is the reduction in government's stake to 51 percent (from 56.1 percent in March 2019), which does away with further ETF overhang on the stock.

With significant improvement in coal availability in the second half of Q3FY20, NTPC's recurring profit for the quarter increased 25.6 percent YoY to Rs 3,000 crore.

Although adjusted PAT increased 26.2 percent to Rs 2,950 crore, there were a few one-offs during the quarter, including net surcharge of Rs 110 crore (post-tax); recognition of previous-year sales of Rs 370 crore (post-tax); Rs 280 crore (post-tax) provision taken on account of CERC order on sharing of efficiency gains (challenged by NTPC in APTEL); lower dividend received from subsidiaries (by Rs 901 crore) and lower PLF-based incentives, said ICICI Securities.

After dropping for five months, the power demand grew 3.5 percent YoY in January 2020 which did benefit from a favourable base.

"Stressed asset resolution is picking up in the IPP space and the domestic coal supply position is comfortable. Imported coal prices have inched up compared to Q3FY20," said Citi.

"NTPC & Power Grid remained top picks in the India electric utility space," it added.