Sensex might have reclaimed its record high level after a wait of seven months, an index constituent has been waiting for over 15 years to revisit its all-time high level. This stock still requires a 29 per cent upside over Wednesday's closing to regain January 2008 price level. But the average target price on the power stock, as compiled by Trendlyne, suggests only a 10 per cent potential upside, suggesting the wait could be prolonged. This is NTPC Ltd.
NTPC is a play on thermal demand. While thermal is still the mainstay, all of its future capacity addition is based on renewables energy with a target of 6 GW per annum. Analysts noted that NTPC currently has most of its operational capacity under the regulated model. This enables it to pass on increase in costs, limiting the impact on profitability.
Since 2008, NTPC's sales went up 4.6 times to Rs 1,76,206.93 crore in FY23 from Rs 38,635 crore in FY08, as per data compiled from corporate database AceEquity. Profit after tax grew 2.24 times to Rs 16,754.70 crore in FY23 from Rs 7,469.90 crore in FY08. PBIDT margin, which was as high as 37.31 per cent in FY08, has come down to 28.09 per cent in FY23. The state-run utility paid a total dividend of Rs 44,646.86 crore in the last 15 financial years, with dividend yield ranging from 1.7 per cent to 5.78 per cent.
NTPC has forayed in renewable generation and has plans to set up 60 GW of renewable energy capacity by 2032. While existing business earns regulated return on equity (RoE) of 18-19 per cent on invested equity (including incentives), the renewable energy capex is on a competitive bidding basis, wherein NTPC enjoys a 1–1.5 per cent lower cost of debt against private sector peers, given its balance sheet size and near-sovereign status.
In its base case scenario, Jefferies expects NTPC to log a 10 per cent EPS CAGR over FY23-25E. It believes operational efficiency improvements and capacity addition ahead of expectations should contribute to positive surprise potential. Dividend yield offers some downside protection, Jefferies said while suggesting a base case target of Rs 205 based on 1.2 times FY25E book value.
Even in its bullish scenario, Jefferies' target of Rs 220 stays short of Rs 242.50 level that NTPC hit on January 15, 2008. On Thursday, the stock ws trading at Rs 185.35, down 1.15 per cent.
In this scenario, Jefferies sees faster-than-expected commissioning of power plants, which could re-rate valuation multiple sharply for the company. Besides, it assumes higher return on equity (ROE) from captive mining to result in earnings surprise. Jefferies sees higher PLF recovery and assigned a PBV multiple of 1.3 times in this scenario.
In a note on June 13, JPMorgan said it is overweight on NTPC. This brokerage has a target of Rs 205 on the stock, as it estimates 10 per cent EPS CAGR over FY23-26 and 4-5 per cent upside to FY25-26 EPS and price target estimates if the 15.5 per cent RoE is maintained.
Jefferies said the forthcoming regulated ROE review will be more of a non-event, as 10-year G-sec yields are close to the levels when the last review took place in December 2018.
"Additionally, Ministry wants to encourage investment in generation and T&D particularly on the renewable side. Hence, we do not anticipate a material change beyond 50 bps, at most, on the 15.5 per cent regulated ROE. Final regulation should be out in January 2024 and normally mirrors the draft. Power Grid and NTPC are the most impacted by any change in this regulation, with Tata Power and Adani Transmission seeing a lower impact," it said.
Nuvama Institutional Equities in a May note said that despite the near-term challenges from expected tightening of CERC norms, it sees NTPC as a long-term play on RE growth and stable RoEs.
The NTPC board will meet on Saturday to consider raising funds up to Rs 12,000 crore via NCDs.
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