Buy This Large-Cap Maharatna Stock For 24% Gains, Operating Cash Flow Grew 31% Y-O-Y

CMP, Target Price, Returns, & Potential Gains

June 22, 2022, NTPC's stock price closed at Rs 137.65/share. The stock in last 1 month has fallen more nearly 7.99%. The 52-week low of the stock recorded is Rs 111.95/share on 26 August 2021. While the 52-week high is Rs 166.35/share, recorded on 19 April 2022. The stock is trading is Rs 25.7 higher than its 52-week low level and Rs 28.7 lower than its 52-week high level.

Looking at the returns on investment, the stock has mixed returns. It has delivered positive returns in 3 months and more than 3 months of the investment period. In 3 months, it moved up 3.61%, in 3 years it moved up 2.35%, and in 5 years it gave 3.92%, respectively. The stock has delivered the highest returns on 1 year of investment, almost 16.36%. On long-term investment, the returns are not promising

Potential Gains - Based on the CMP of the stock and the estimated target price of Rs 170/share, the share price of NTPC could see a jump of 24% in 12 months.

Steady earnings growth outlook given regulated RoE model

NTPC has guided to commercialise 5GW/6GW of new capacities in FY23E/FY24E, out of which 1.5GW/0.95GW will be for RE capacity. Additionally, due to the recent power supply crisis, NTPC plans to add 6GW of thermal power capacity at an estimated capex of Rs. 60,000 crore in the next 2-3 years. This means that NTPC would have 13-14 GW of thermal power capacities under implementation and the same would drive 12% CAGR in standalone regulated equity base over FY22-24E and reach Rs. . 88,723 crore by FY24E versus Rs. 70,890 crore in FY22. The regulated tariff model assures that NTPC will earn fixed RoE of 15.5% on power project equity and thus provides strong earnings growth visibility over FY22-24E.

Focus on RE expansion to drive long-term growth

NTPC has an operational RE portfolio of 1.8 GW, 3.4 GW under construction and 2.8GW under tendering. NTPC expects RE portfolio to expand to 15GW/60GW by FY26/FY32. Although, the transition towards cleaner energy would be achieved over next decade but is crucial to improve ESG score and drive the next leg of growth and re-rating for the company. Strong operating cash flows (annual average operating cash flow of Rs. 23,887 crore over FY18-22) and low cost of debt (5.94% given high credit rating) to help fund investment in RE capacities and generate adequate IRR.

Potential IPO for NTPC Green Energy to unlock value; Strong cashflows to support dividend payout

The company has created separate subsidiary NTPC Green Energy Limited and will transfer all RE assets to it post clarity on taxation. NTPC plans to monetize RE through an IPO or induction of strategic investors and eyeing monetisation of some assets in FY23. NTPC's standalone operating cash flow grew strongly by 31% y-o-y to Rs. 35,388 crore in FY22 and the same is expected to remain strong and thus we expect sustained high dividend payout (at 42% in FY22).

Sharekhan Maintain Buy Call with Target Price of Rs 170/share

NTPC's risk-averse regulated business model provides earnings growth visibility/RoE improvement and RE expansion would drive gradual re-rating of the stock as it would allay concern on the ESG front. Additionally, potential monetisation of its RE business could further improve shareholders' returns in the coming years. A valuation of 0.9x FY24E P/BV is attractive given a steep discount of 39% to historical average one-year forward P/BV multiple of 1.5x and a healthy dividend yield of ~5%. Hence, we maintain a Buy on NTPC with an unchanged Price Target of Rs. 170.

According to Sharekhan, the key risk is, "Lower-than-expected commercial capacity additions amid delay in projects due to COVID-19 and coal availability shortages could affect earnings. Moreover, any write-off related to dues from discoms could affect valuations."

Company Overview- NTPC Ltd

NTPC is a navratna company. It is India's largest energy conglomerate with roots planted way back in 1975 to accelerate power development in India. Since then it has established itself as the dominant power major with a presence in the entire value chain of the power generation business. From fossil fuels, it has forayed into generating electricity via hydro, nuclear and renewable energy sources. To strengthen its core business, the corporation has diversified into the fields of consultancy, training of power professionals, power trading, rural electrification, ash utilisation and coal mining as well. NTPC is ranked No. 2 Independent Power Producer (IPP) in Platts Top 250 Global Energy Company Rankings.