NTPC stands out as one of the six worst-performing stocks on the Nifty 50 Index on YTD/1Y/3Y basis. The stock is down 14% YTD, trading at 0.8x FY22e PB (closest to its lowest range in ten years), 7x one year forward PE and 5.5% dividend yield. This is despite feeling minimal COVID-19 impact (we expect FY21 reported earnings growth of 23% y-o-y and 20% earnings CAGR over FY20-23e). We believe investor concerns surrounding ESG and government ownership are some of the key reasons for the underperformance.
We think improving its ESG score and changing investor perceptions on government ownership is possible: While environment is a key reason for its low score, as most plants are coal-based, we believe governance scores are also likely to be low as it does not meet two basic regulatory requirements, ie to have at least one female director on the board and 50% or more board members’ independence (which it was fulfilling a year ago). Increased focus on this could improve its governance score, while acquiring renewable projects or acting as aggregator of power (given its tripartite agreement with discoms) could help improve its environment-related score.
NTPC has already started its journey towards improving its ESG score: It has launched its integrated Annual report, and has set itself a target for RE to contribute 35% of capacity by 2032, from 5% currently. It has started participating in RE auctions, with its lowest cost of borrowing among peers its biggest strength. It has launched a Brighter Plan report 2032, which highlights its future plans on these fronts. While investors are often wary of government ownership, we think recent actions by other PSU companies indicate the Centre is encouraging managements to include shareholder value creation as a point of focus.
Investment view: NTPC enjoys a superior business model with regulated returns, as a flagship enterprise in a country that will continue to see power demand growth into the long term. Its 20-GW of plant under-construction allows it to comfortably grow earnings over the next three-four years, and its low cost of borrowing should stand it in good stead in RE auctions and portfolios. Maintain Buy, raise TP to Rs 165 (from Rs 155) as we roll forward our valuation to December 2020. Our TP implies 1.2x FY22e P/B.
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