NTPC (CMP: ₹167.2) reached a 12-year high price of ₹168.45 on September 6, which was above its high of ₹167.21 last achieved in 2010. The stock has given its investors a return of about 33 per cent on a YTD (Year-to-date) basis while outperforming its peers in the power generation space such as JSW Energy, Tata Power, and Torrent Power which gave returns around 17.73, 10.88, and 4.83 per cent, respectively.

Amongst major power generation companies, only Adani Power which provided its investors with a return of over 300 per cent on a YTD basis has outperformed NTPC this year. The Maharatna company stock has also outperformed the Indian benchmark index which is currently at around the same level as it was at the start of the year.

Reasons for outperformance

The rally in the stock since the start of the year can be attributed to various factors. One, the recent gains in the NTPC stock might be on account of its acquisition of the stressed Jhabua Power Plant with a thermal power capacity of 600 MW.

This acquisition has been made under the Insolvency and Bankruptcy Code (IBC) process wherein NTPC will be having 50 per cent of the company for consideration of ₹925 crore and will retain all the management rights and control over the company.

For the company, it is the first acquisition happening through the NCLT route. As per the company, along with the organic route, the company is also seeking such inorganic opportunities for capacity expansion with the current capacity surpassing 70 GW post the acquisition.

Two, the company in its FY22 annual report stated that it aims to hive off the identified Renewable Energy assets of NTPC along with NTPC Renewable Energy (NREL) to NTPC Green Energy Limited (NGEL) and carry out a stake sale of NGEL by way of IPO or strategic stake sale route.

The NGEL stake sale is part of its asset monetisation target of around ₹15,000 crore. According to media reports, some entities namely ArcelorMittal, Brookfield and Canada Pension Plan Investment Board have shown interest in buying a 5-10 per cent stake in NGEL. The buzz around this has also been a factor which the stock of NTPC gained in recent times.

Valuation is also a key factor

The performance of NTPC stock over the years has been underwhelming with the stock yet to breach its all-time high levels of around ₹235 in November 2007. Even adjusted for dividends since 2007 (implies an adjusted price of around ₹135 in November 2007), the stock’s returns are sub-par.

However, one can argue that the stock might have been over-valued earlier with the P/E of around 30 during 2007 which has been decreasing constantly since then, reaching attractive valuation levels of marginally below 10 times earnings in the current times. Its dividend yield is also good at around 4.25 per cent.

With a positive investor appetite for value stocks in the current environment, its valuation is also a key factor that has contributed to its outperformance YTD.

In our BL Portfolio edition dated August 14, we had recommended an accumulate rating on the stock on account of reasonable valuation, attractive dividend yield, consistent pay-out and growth prospects in renewable space. Another factor was also the potential upside catalyst from monetisation of renewable energy assets.