We remain positive on NTPC from a medium-term perspective, given the pickup in capitalization and the decline in fuel u/r – which should drive 14% earnings CAGR over FY19-21. Maintain Buy with a DCF-based target price of INR163/sh. Over the near term though, the risks related to government divestment and the uncertainty on value accretion over the potential acquisition could be an overhang on the stock.
After generating flat EPS growth over FY16–19, NTPC is likely to post a strong 15% CAGR over FY19–21E on the back of recoupment of under recoveries and 8GW of cumulative capacity commercialisation. Maintain ‘BUY/SO’ with a target price of INR158. The stock is trading at FY20/21E P/B of 1.0/1.0x.
Valuation & Outlook: Improved performance in terms of capacity addition and improvement in under recoveries of fixed costs will drive PAT CAGR at 11.7% over FY19- 21E. However, rising clamour on renewables as driving force for energy would limit the re rating for conventional energy companies like NTPC. We value the company at 10 P/E on FY21 EPS to arrive at a fair target of | 136.
Outlook and valuation: Over FY2018-20, the company is expected to post a CAGR of 10.5% and 10.2% in the sales and net profit respectively. At current price, the stock trades at 1.0xBV FY2019E; which implies a very low ~14-15% business ROE’s and low growth prospects for the company over a long period.
Limited re-rating to eclipse strong capacity addition; maintain HOLD NTPC is set for strong capacity addition trajectory in FY19-21 that is expected to lead to strong growth in regulated equity base of the company and that too at a time no other player is coming up with capacity. This coupled with a strong balance sheet profile will be negated with limited upside in multiples given thermal power as a segment faces long term visibility challenges in the wake of rising tide of renewables. Hence, we continue to value the company ay 1.1x FY20E book value and continue to ascribe a fair value of | 147 per share.