Why NTPC is a good buy now

Power generation in India has been falling with shrinking industrial production.

This has prompted some investors to wonder if it makes sense to own stocks of power- generating companies. As a result, stocks such as NTPC have taken a pounding in the past six months. The stock has fallen nearly 20 per cent since BusinessLine’s last ‘buy’ call in May 2019.

But the fall in the stock price presents a good buying opportunity for investors with a long-term perspective.

The current dividend yield is a healthy 4.7 per cent. Besides, the stock is trading at a 12-month trailing price-to-earnings multiple of about eight times, below its three-year average multiple of about 11.5 times.

The company’s fundamentals and its long-term business prospects seem sound.

Also, many of its under-construction projects are expected to come on stream in the next few years; this should add to earnings growth.

Several factors have weighed on the NTPC stock over the past few months. One, its electricity generation fell 3.2 per cent y-o-y to 145.3 billion units in the first half of FY20.

This was primarily due to the industrial slowdown that dampened the demand for power. The growth in the Index of Industrial Production (IIP) had been negative from August to October this year. Around 40 per cent of electricity demand comes from the industrial sector. A longer-than-usual monsoon, too, resulted in lower electricity production from thermal sources.

There were also fuel supply issues at NTPC’s 3,000 MW Talcher thermal plant in Odisha.

Frequent strikes by workers at Mahanadi Coalfields, a subsidiary of Coal India, impacted the availability of fuel at the Talcher plant. Other plants at Sipat, Farakka, Rihand and Korba also faced fuel shortage.

Due to these shortages, NTPC could not recover fixed costs to the tune of ₹332 crore in the July-September quarter of 2019.

The impending acquisition of THDC and NEEPCO by NTPC, approved by Union Cabinet recently, also dragged down the latter’s stock. The acquisitions will likely be completed by March 31, 2020, to help the Centre meet its revenue targets.

While NTPC has decent cash balances, it will have to resort to debt to complete the acquisition of the two companies. Although the acquired companies will be earnings accretive for NTPC in the long run, the debt that will have to be taken for the acquisition is causing uncertainty.

Profit growth

NTPC has been posting good financial results. In FY19, its consolidated revenue grew about 9 per cent y-o-y to ₹95,742 crore while its profit rose about 20 per cent to ₹12,640 crore.

NTPC’s consolidated revenue during the September 2019 quarter at ₹24,460 crore was up about 5 cent y-o-y. Its consolidated profit grew much faster at about 38 per cent to ₹3,409 crore.

The strong rise in profit was aided by a three-fold rise in other income as the company booked late payment surcharge (18 per cent a year) to discoms that had not paid their dues.

Receivables more than doubled year-on-year to over ₹19,400 crore as of September 2019, as state distribution companies delayed payments; this has led to a spike in late payment surcharge.

For bills raised after August 1, 2019, NTPC has been getting its payments regularly, as all power purchases by discoms have to be backed by a letter of credit.

This has helped it curb the rise in interest costs during the September quarter.

In the June 2019 quarter, NTPC posted tepid numbers as rules prescribed under a deviation settlement mechanism had led to some large under-recovery of fixed costs. These rules were then rolled back and the impact was restricted to the June 2019 quarter.

Project commissioning

NTPC had missed its target of commissioning projects in FY19, but things have improved since then. As per its plan to front-load most of its projects to be commissioned in FY 20, the company has commissioned 3.17 GW of projects at the standalone level and 4.5 GW at the group level till now, against a target of 3.97 GW at standalone level and 5.29 GW at the group level for FY20.

These projects, having been capitalised in accounting terms, will soon start earning returns for the company. As long as NTPC continues to commission projects, as guided, its profit should continue to rise steadily.

Add to this the high current dividend yield, and the stock has the potential to offer good upside to investors.

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