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NTPC: Unpacking India’s Energy Giant ⚡

Updated: Mar 20, 2023

India recorded the hottest February since 1901, with average temperatures hitting 29.5 degrees celsius. This is the highest ever since India started keeping proper weather records. Unfortunately, an early start to the summer doesn’t imply an early end, and the weather department has forecast an ‘enhanced probability’ of heatwaves between March and May. Yes, the worst is yet to come!

But a harsh summer also brings in several investment opportunities. While you’re suffering in the heat, the least you can do is enhance your probability of making money. Several products can see strong growth and near-term tailwinds - beverages, ice creams, air coolers, air conditioners, and personal care products, amongst others.

But central to heating is the requirement of cooling, and subsequent use of electricity. And we have just the right stock for this summer - NTPC!

But wait, isn’t power a messy space to be invested in?

Historically, yes. Despite India’s increasing energy consumption, NTPC, which is the largest power producer, hasn’t performed well at all.

From 2010 to 2020, for ten long years, the stock hasn’t performed well. In fact, returns have been negative over this period, whereas electricity generation in India went up 72%.

Despite increasing demand for power, India’s power sector has been facing several issues in the form of regulation, government intervention, tariff control, availability of raw materials, and profitability.

However, a lot of these issues are getting resolved, and NTPC has finally seen its share of returns. In the last year, the stock is up 35%, and there is more juice left.

India to hit peak demand in 2023

There has been unprecedented demand for electricity in India spread across households, office space, commercial outlets, and industries.

In the first nine months of FY23, power generation in the country grew by 10% and is set to grow at a faster rate given the onset of early summer, and strength in India’s manufacturing PMI, which has been up showing improvement for the last 19 months now. January 2023 already saw power consumption growing at 13% YoY to 126 billion units.

Another way of measuring demand is peak power demand - which is essentially the single-day peak demand. In April 2023, the government expects a peak demand of 230 GW, which is much higher compared to the 216 gigawatts (GW) seen last year.

All that power consumption is bound to have a positive impact on India’s largest power producer - NTPC, which will continue seeing double-digit revenue growth.

But will the supply match up?

A supply deficit was a common situation. However, it has gradually improved over the last many years.

From 13% in FY10, the peak deficit had consistently come off and reached a low of 0.4% in FY21.

However, the last couple of years has seen an increase in the peak supply deficit owing to a massive pick-up in activity post-Covid, raw material shortages, and raw material prices going off the roof.

In FY23 so far, while peak demand was at 216 GW, only 207 GW was met, resulting in a 4% deficit. The last time India hit a 4% deficit was in FY15.

A pertinent question in the context of NTPC then is - even if demand is growing in double-digits if supplied power doesn’t grow, how will revenues grow?

Government is resolute on no power cuts

The government is resolute on ensuring no power cuts happen this time around. It has taken several steps to ensure demand is met. All these steps are likely to bode well for NTPC:

  1. The government invoked Section 11 of the Electricity Act, 2003 which states that under extraordinary circumstances, the government can ask power companies to operate in accordance with directions given.

  2. It has directed all coal-based plants to undertake maintenance in advance so that they don’t shut down during the crunch period. The Power Ministry has been coordinating with the Ministry of Coal and the Ministry of Railways to also ensure the availability of coal, and its transportation so that power generation doesn’t get hampered.

  3. It has also asked all imported-coal-based plants to run at full capacity. Most imported-coal-based plants were either shut down or partially operational because of (i) high international coal prices, and (ii) Power Purchase Agreements (PPAs) signed with customers, which didn’t have provisions to pass on the increase in costs of generation. The Power Ministry is also working out a rate that compensates power companies for all costs associated with using imported coal.

  4. It has also directed NTPC to operate all its gas-based plants to full capacity. Most gas-based power plants were also either shut down or partially operational because of their inability to source gas. However, the government has also directed GAIL to supply natural gas to NTPC thereby ensuring the plants run.

  5. While imported-coal and gas-based generation turns out to be more expensive, the CERC (Central Electricity Regulatory Commission) allowed a pricing change on these generation methods on IEX. Now, these will be allowed to be bought and sold at a price of as high as Rs. 50 per unit, from the earlier Rs. 12 per unit, which was unfeasible given the higher variable costs for these plants.

💡 Double-digit growth in demand, assured raw material supply, running of its idle gas capacities, and pass-through of higher variable costs due to imported coal and natural gas all work well for NTPC in the near term, ensuring strong revenue and profit growth.

Why NTPC though?

All the factors should ideally make a case for investing in any power company. But why are we tilting towards NTPC?

  1. Largest player - NTPC is the largest energy producer in India, with a capacity of 70 GW. It produces nearly a quarter of all electricity generated in India. With more than 80% of all of NTPC’s power generated using coal, the government’s steps to ensure coal availability is bound to make NTPC a key beneficiary.

  2. Coal availability - NTPC also has captive coal mines, thereby reducing the dependence on externally bought coal. In the first nine months of FY23, NTPC produced 14.55 MT of coal. a 55% increase YoY. At 10%, it makes up for a small part of its overall needs, but definitely becomes crucial in times shaded by low availability and high demand.

  3. Higher utilisation - Nearly 10% of NTPC’s capacity is gas-based. Government action on the supply of gas, and pricing revisions on the exchange will ensure the running of dormant capacity, thereby improving overall efficiency levels.

  4. Better efficiency - NTPC has consistently had a higher Plant Load Factor (PLF) relative to the industry average. PLF is a measure of the percentage of capacity used by energy companies. A higher PLF signifies greater efficiency in energy production. The company has maintained an impressive PLF of 74.5% for 9MFY23, while the all-India average was at 63%.

  5. Lower cost of debt - Power generation is a capital-intensive business, with a high dependence on debt financing. NTPC has an inherent advantage in borrowing funds due to it being a government-backed giant. Hence all of its issued bonds get higher ratings than its peers. It benefits from a lower cost of debt, which was at an average of 6.32% in 3QFY23. This is particularly beneficial as NTPC plans to undertake CAPEX of Rs. 25,000 crore per annum until FY26, totalling up to Rs. 1 lakh crore. For context, the current debt of the company is Rs. 1.9 lakh crore.

Value on the table

All the near and long-term tailwinds are likely to result in a 12% earnings CAGR for NTPC over the next two years. There are several reasons why this should result in a re-rating for NTPC, and help continue the rally on the stock:

  1. The 12% CAGR over the next two years is an acceleration in earnings growth compared to the 9% in the five years prior

  2. Increased government support, raw material availability, reduction in fixed cost under-recovery and higher PLF incentives resolve a lot of the past issues

  3. Its green energy initiatives not only help raise the profile of the business but also can be monetised at attractive valuations. Media reports suggest that Malaysia’s Petronas has offered Rs. 3,800 crore to buy a 20% stake in the green energy arm, valuing it at US$ 2.3 billion (11% of current market cap), making it the first-of-a-kind deal in the green energy space in India at this scale

A SOTP-based valuation for NTPC leads to a price of Rs. 220 per share, which implies a valuation of 1.2x P/BV and 9x P/E on FY24 forecasts.

The company looks good not only for the summer but also beyond. A plan to double capacity over the next ten years, while tilting the portfolio towards greener options and a more favourable operational environment makes for a strong case to buy NTPC.

Additionally, we are particularly attracted to the stock given current market conditions. Heightened volatility in the markets does make us favour companies with a strong asset base. Inexpensive valuations and an attractive dividend yield of 5% make it even more suited to weather the current storm.

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