NTPC rating – Buy: Further progress on path towards a green image

The last auction that NTPC won was at a tariff of Rs 2.34/kWh without VGF for the RUMSL auction in Jul-21 of 325MW.

NTPC Ltd won 1.99 GW in the e-auction of solar power project contract under the CPSU Scheme-II, tranche-III of 5 GW tender. Under the scheme, NTPC will earn a tariff of Rs 2.45/kWh, get variable gap funding (VGF) of Rs 4.5m/MW and gets to establish the plant at the location of its choice. However, it will be limited to using only domestic modules. The last auction that NTPC won was at a tariff of Rs 2.34/kWh without VGF for the RUMSL auction in Jul-21 of 325MW.

Path to green image: With this NTPC has 1.3GW of commissioned projects, 2.9GW under implementation and another 2.9GW which were won recently but for which PPAs have yet to be signed, taking the portfolio to c7GW. Lucrative projects: We believe Rs 2.45/kWh of tariff with a VGF subsidy is very attractive and could allow NTPC to generate an Equity IRR in the range of 18-22%. We believe mid-teen EIRRs are possible on (i) higher capacity utilisation factor due to new tech; (ii) falling borrowing cost; (iii) long duration debt funding.

NTPC funds renewable projects with 80:20 debt equity vs 70:30 for thermal projects making it very competitive. It expects to become an ‘Integrated Energy Company’ with its sight on “green” hydrogen, ammonia and methanol, and even EV charging under its plan of 60GW of renewable capacity by 2032. Backed by a staffing strength of c17,000 people, lowest cost of capital and sovereign support (compared to peers), it is likely to be a source of power capacity addition for a growing renewable market.

Investment view: NTPC enjoys a superior business model with regulated returns, as a flagship enterprise in a country that should continue to see power demand growth into the long term. Its c18GW of plant under-construction should allow it to comfortably grow earnings over the next three-four years, and its low cost of borrowing should stand it in good stead in renewable power auctions and portfolios. This gives it access to a strong balance sheet which should allow it to experiment with multiple long-term growth opportunities.

Maintain Buy and TP of Rs 180: We value NTPC’s core FY23e regulated equity at a justified P/B target of 1.6x and balance investments at 1x P/B. This results in our unchanged target price of Rs 180 which implies 1.2x FY23e P/B and implied upside of c42%. We rate the stock Buy. Key downside risks: aggressive bidding for renewable portfolio; delays in commissioning of plants.