NTPC Stock Rises Despite Q4 Earnings Miss; Here’s What Brokerages Say?

Shares of National Thermal Power Corporation (NTPC) rose on May 27 as brokerages kept their positive ratings on the stock, despite the company reporting earnings below expectations for the quarter ending March 2024.

Morgan Stanley maintained its ‘overweight’ rating on NTPC, setting a target price of Rs 390 per share. The brokerage pointed out that NTPC’s recent earnings fell short mainly due to fixed cost under-recoveries and lower profit contributions from subsidiaries.

Despite the earnings miss, NTPC has a strong renewable energy (RE) portfolio of 23.2 GW. Morgan Stanley noted that there is speculation about a potential RE IPO, possibly by October or November 2024.

At 9:18 am, NTPC shares were trading about 1% higher at Rs 378.40 on the National Stock Exchange (NSE).

NTPC, India’s largest integrated power utility, saw its consolidated net profit for Q4FY24 jump 33% year-on-year due to higher power demand from the intense heat in the country. The company’s revenue from operations also rose over 7% year-on-year in the March quarter, with increases in both power generation and coal production.

Nuvama Institutional Equities analysts highlighted NTPC as a unique investment in thermal demand and the transition to renewable energy, supported by its size and profitability. While thermal power remains crucial, future capacity additions are focused on renewable energy, targeting 6 GW per year.

Nuvama noted that NTPC’s current operational capacity is mostly under a regulated model, allowing it to pass on cost increases and limit profitability impacts. They expect NTPC’s thermal profitability to improve due to:

1. No significant fuel-based under-recoveries
2. Improving plant load factors (PLFs)
3. Accelerated project commissioning
4. Higher incentives

NTPC’s focus on renewable energy benefits from its ability to blend RE with thermal plants, ready access to human and financial resources, and a risk framework that protects against downsides. The company is also transitioning towards decarbonizing industries and mobility, beyond just renewable energy.

NTPC earns regulated returns on equity (RoEs) of 18-19% on invested equity, including incentives. For RE projects, which are based on competitive bidding, NTPC enjoys a lower cost of debt compared to private sector peers, enabling higher internal rates of return (IRRs) despite competitive tariffs.

With NTPC’s 25% share in India’s power generation and the country’s plan to add 30-40 GW of RE annually, Nuvama believes NTPC can maintain its market share without needing external equity.

Nuvama maintained its ‘buy’ rating on NTPC stock and raised the target price to Rs 435 from Rs 367.

Key Risks for NTPC:

1. Project Delays: Delays in executing pipeline projects could negatively impact earnings and valuations.
2. SEB Delays: NTPC earns a surcharge on overdue payments from state electricity boards (SEBs). However, if the SEBs’ financial health worsens, there could be a risk of future waivers, although Nuvama sees this as unlikely.
3. Fuel Supplies: Non-availability of fuel could affect performance, leading to higher-than-expected fixed cost under-recoveries and impacting RoEs, potentially lowering the regulated returns of 15.5% expected from 2024-29.