NTPC Rating: Buy-Strong operational numbers in Q2FY21

NTPC has reported strong operational numbers in Q2FY21 on the back of power demand recovery. While reported standalone PAT was Rs 35 bn, up 7.4% y-o-y, adjusted PAT was Rs 39.4 bn, improving 22.9% y-o-y (adjusting for one-offs and onetime rebate on fixed charges). With H1FY21 consolidated adjusted profit at Rs 83.6 bn, up 16% y-o-y, NTPC is expected to register 15% earnings CAGR over FY21-23.

The company’s green commitments remain firm and we expect it to be visible in its ESG scores going forward. NTPC has announced it will buy back 197.9 mn shares (2% of total share capital) at Rs 115/sh (total consideration Rs 22.76 bn), but still expects to pay 5% of net worth as dividend over and above the buyback in FY21 (implies Rs 6/sh). Maintain Buy with an unchanged TP of Rs 165/sh.

Operational profitability remains high: NTPC provided for the balance Rs 5.6 bn rebate during Q2FY21 (`8 bn provided in Q1FY21). Adjusting for the same, PAT in H1FY21 was Rs 73 bn, up 19% y-o-y. Revenue for the quarter was Rs 246.8 bn, up 8.4% y-o-y, while Ebitda was Rs 71.8 bn, up 13.2%. Regulated equity was Rs 635 bn vs Rs 618 bn at FY20-end. On consolidated basis, reported PAT in Q2FY21 was Rs 34.9 bn, down 7.7% y-o-y, but adj. PAT in H1FY21 (adjusting one-offs and Rs 15.07 bn FC rebate) was Rs 83 bn, up 16.2% y-o-y.

Buyback announced: NTPC has announced a buyback programme through which it will buy back 197.9 mn shares (2% of total share capital) at Rs 115/sh (total consideration `22.76 bn). It has fixed 13th Nov as the record date. Special approval has been taken so that GoI’s stake does not go below 51%.

Decoding the quarter for the year ahead: With adjusted EPS for standalone/ consolidated entity at Rs 7.4/8 in H1FY21, we believe, NTPC is on course to achieve FY21e target EPS of Rs 12.3/14. Rs 102.6 bn increase in regulated equity in TTM has resulted in strong core earnings, which a robust commissioning pipeline, supported by green initiatives, will strengthen further. Overdues (>45days) now stand at Rs 191.6 bn but are expected to reduce to Rs 160 bn by FY21-end. Under-recoveries were Rs 4.97 bn at Q2FY21-end. The company expects FY21 under recovery at ~Rs 2.5 bn.

Evolution into a cleaner and greener company should be rewarded: We believe NTPC is taking huge strides to transform itself into a company with cleaner coal assets, higher share of renewables and greater focus on all ESG parameters. Transition to cleaner technologies requires huge investments, which, without external support, only cashflows from company’s current basket of assets is able to fund. This is apart from the fact that thermal will continue to retain its status as the primary fuel for power generation in the next two decades in India.

Thus, being essential for NTPC’s as well as India’s transition to cleaner generation technologies, rather than completely discrediting it, investors should view current thermal technologies as vital for funding future green technologies and give it a larger scope in our endeavour to achieve a greener future. Intent of the company is very clear, which is to move towards “Clean, Green & Sustainable”. We believe if all forms of hydrocarbons (solid, liquid or gas) are shunned immediately, most of the companies become un-investible.

Maintain BUY: We maintain Buy with an unchanged target price of Rs 165/share. The stock is currently trading at FY22e standalone P/BV of 0.7x (P/E of 5.4x) and FY22e consolidated P/E of 4.8x.