NTPC, India's largest power generation company, has seen a steady increase in its share price over the last year, moving from ₹132 apiece to the current price of ₹173, yielding a return of over 31%. After reaching a 52-week low of ₹126 in March last year, the stock has witnessed an impressive surge of 37.30% to date and is hovering near its one-year high of ₹183.
Despite such a strong performance in a volatile market, domestic brokerage firm Sharekhan expects the stock to continue its bull run, citing three key factors. Firstly, the brokerage notes the strong power demand in the country, which is expected to provide a favourable environment for the company's growth.
India’s power demand grew strongly by 10% YoY in 9MFY23, with a peak demand of 206 GW (12% higher YoY) in December 2022. The outlook remains strong, given the expectation of sustained double-digit growth in power demand during the summer. This bodes well for higher PLF for thermal power plants and would benefit NTPC, said the brokerage.
Sharekhan highlights that NTPC’s thermal PLF of 74.5% in 9MFY23 was much higher than the national average of 63% and would further improve NTPC’s thermal PLF over Q4FY23-Q1FY24, given high power demand (peak demand estimate of 229 GW in April 2023).
Secondly, NTPC's focus on expanding its renewable energy portfolio is viewed positively, given the increasing global concerns about climate change and sustainable development.
NTPC expects its renewable energy (RE) portfolio to expand to 15GW/60GW by FY26/FY32 versus 3.1 GW of operational RE capacity currently. Although the transition towards cleaner energy would be achieved over the next decade, but it is crucial to improve the ESG score and drive the next leg of growth and re-rating for the company, the brokerage underscored.
NTPC has transferred 15 renewable energy assets and a 100% stake in NTPC Renewable Energy Limited to its subsidiary, NTPC Green Energy Limited. The transfer of assets is valued at approximately Rs. 10,067 crore, while the transaction for NREL is valued at Rs. 732 crore.
This move is expected to allow for the monetization of 10–20% of the minority stake in NGEL, potentially unlocking value and leading to higher dividend payouts, it added.
Finally, discom total outstanding dues to power generation companies have declined sharply by 49% to Rs. 58,647 crore in February 2023, and this would strengthen the balance sheet of power companies like NTPC, according to the brokerage.
Further, the company has guided to commercialise 6GW of new capacities annually over FY23E–25E, and the same would drive a 10% CAGR in its standalone regulated equity base over FY22–25E and reach Rs. 93,240 crore by FY25E versus Rs. 70,890 crore in FY22.
The regulated tariff model assured that NTPC would earn a fixed RoE of 15.5% on power project equity and thus provide strong earnings growth (expect 15% PAT CAGR over FY22-25E) visibility.
NTPC's valuation appears attractive at 1.1x FY25E P/BV due to its strong growth outlook visibility, healthy RoE of 14–15%, and the potential value unlocking through the minority stake sale in NGEL. This is a steep 26% discount to the historical average P/BV multiple and a healthy dividend yield of 4-5%, the brokerage noted.
In light of all the growth factors, Sharekhan has maintained its "buy" rating on the stock with a target price of ₹200 apiece.
24 analysts polled by MintGenie on average have a 'strong buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.