NTPC is Harshvardhan Dole's top pick in power sector. Here's why

“When we apply the three filters of revenue model, cash flows and attractive return ratios, the only name that stands out is NTPC. Each year, NTPC is set to add at least 6,000-7,000 MW capacity which is coal and renewable based and that should lead to standalone and consolidated earnings growth of anywhere between 8% and 12% over the next three years,” says Harshvardhan Dole, VP, IIFL Securities

The power ministry in their latest directive talks about all generation companies importing coal for blending purposes largely on the back of the surge in power demand. How are you looking at this latest directive and the implication on some of the companies?
Hypothetically If the power demand continues to grow at say 12%, then clearly relative to domestic supply, the demand is going to be significantly higher and in order to avoid a situation that we saw last year, the government seems to have taken a pragmatic step to ensure that there is no crisis at the later date and perhaps directed the utilities to import some coal.

However, the demand growth of power is linked to the availability of working capital within the overall SEBs. If the working capital dries down because we have seen that none of the SEBs have taken tariff increases and the much awaited reforms are certainly not getting fast tracked, then the demand growth may slow down and the need for imports to that extent may not even arise. At the moment, this seems to be more of a precautionary step rather than something which is coming out of dire need.

We are also seeing the Centre directing to start looking at more coal imports to get our act going when it comes to the renewables. The last time, when we had the auctions, the tariffs were negative and we saw the industry react. We have seen how renewable players have fizzled out and disappeared?
From the national security perspective, we need to put up more renewable capacity; a) it is green and b) it is significantly cheaper than conventional resources. The issue however continues to remain the same. Land acquisition and runaway increase in capital cost are sticky issues and there is no quick fix to it. There has to be coordination between the Centre, teh states and the developers so that the process of land acquisition is streamlined and coordinated efforts made to keep the capital cost under check. Of course, adequate financing has to be made available to the whole sector.

Theoretically, if you were to achieve the 500 gigawatt target that the Centre has placed, each year we need to add at least 40,000-45,000 MW of green capacity. The numbers are there in front of us and a significant effort needs to be put in in order to meet that target. So yes, I am quite enthused by the tall target that the Centre has set, but then there has to be coordinated effort between all the stakeholders for it to be a reality.

In terms of stock specific action what are your top recommendations from the power sector? Is it going to be a bit of more defensive plays the likes of PFC, REC with respect to the dividend support or is it going to be one of those generators like Tata Power and JSW Energy?
Well what we like is essentially sustainability of the revenue model, cash flows and attractive return ratios. When we apply these three filters, the only name that stands out is NTPC. Each year, NTPC is set to add at least 6,000-7,000 megawatt of capacity which is coal and renewable based and that should lead to standalone and consolidated earnings growth of anywhere between 8% and 12% over the next three years. This is going to be non-dilutive growth.

In order to keep things even more attractive, the dividend payout has been consistently higher and it is offering a very asymmetric payoff which means that the downside is fairly limited. If the delivery of earnings continues, then there is a massive rerating ahead of the stock. When we apply these three filters, NTPC is the top name that emerges as per our style of recommendation and that is our top pick at the moment. The other names that you mentioned we will be quite cautious and we will be selective on those.