NTPC: Waiting for the Godot moment


The investment case for NTPC Ltd’s offer for sale is quite simple. The company operates on a regulated RoE (return on equity) business model and it has a capacity addition pipeline no other power generation company in India can boast of.

This low-risk business model provided little excitement to investors till now. The stock, on an average, delivered a return of less than 7% per annum over the last three years. Total returns stood at 20%, lower than the 32% delivered by the BSE 500 index.

Sanjay Jain, senior vice-president (institutional research) at Motilal Oswal Securities Ltd, lists three factors for the subdued returns. One is the new and disputed mechanism to calculate gross calorific value of coal, which is resulting in cost under-recovery or loss of calorific value during storage. The second is the reduction in utilization-based incentives, which are weighed down by subdued demand. And the third is poor execution and delays in commercialization of projects.

While these factors weighed on NTPC’s earnings (see chart), many investors preferred buying Power Grid Corp. of India Ltd instead, which has not seen such unforeseen developments and delivered strong earnings growth in recent years.

But as the clichéd disclaimer goes, the past will not have a bearing on the future performance of the stock. Several analysts including Motilal Oswal’s Jain now expect the stock to soon reach an inflection point, as NTPC sees bunched up capacity additions and project commercializations.

The company plans to add 5,438 megawatts (MW) this fiscal year and has a strong pipeline for the next year as well. As new projects expand NTPC’s regulated equity and improve return ratios, Motilal Oswal expects the stock to re-rate.

“Over the next three years, we expect a >30% rise in NTPC’s commercial generation capacity and a >50% increase in regulated equity. We expect FY17-19F normalised EBITDA/EPS CAGRs of 19%/16%) and RoE to improve from ~10% in FY17 to ~12% in FY19F,” Nomura said in a note early this month. Ebitda is earnings before interest, tax, depreciation and amortization; EPS is earnings per share; and CAGR is compound annual growth rate

While the stock’s valuation at around 10 times one-year forward earnings estimates is undemanding, the key is to match promise with performance. As Jefferies India Pvt. Ltd points out, one of the company’s major investor concerns has been its ability to deliver on capacity addition. Against the target of 5,438MW, the broking firm expects NTPC to add only 3,310MW in the current fiscal year.

To be sure, NTPC at the stand-alone level added 3,520MW last fiscal year. But less than half of those capacities were commercialized or began generating revenues last year. The challenge is to keep up the capacity addition momentum and early commercialization of the projects. That will add to company’s earnings and improve the returns for investors participating in the government’s sale of shares.