Buy NTPC, target Rs 157: Emkay Global Financial Services

Emkay Global Financial Services has given a buy recommendation on NTPC with a target price of Rs 157.

Shares of NTPC traded at Rs 129.9 around 1:05 pm on 11 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

Investment rationale by the brokerage:

NTPC’s June 2019 plant availability factor (PAF) continued to show a year-on-year recovery, driven by improved coal supply and inventory across power stations.

In June 2019, PAF improved to 88.5 per cent from 85.3 per cent in June 2018. As a result, PAF for Q1FY20 improved to 91.4 per cent from 86 per cent in Q1FY19.

During the quarter, PAF improved across gas-based stations in the North including Dadri TPS, Rihand, Singrauli and Unchahar. In East region, PAF improved at Farakka I & II, while declined across Farakka III and Kahalgaon II plants, largely due to the planned overhauls.

In the South, PAF declined at Simhadri Stage I station, while improved at Simhadri Stage II station.

PAF improved across Mauda I & II and Solapur, but it declined across Sipat II and Vindhyachal II plants. The fall across selected stations was in the wake of planned plant overhauls.

The brokerage expects NTPC to report an under-recovery of Rs 110 crore in Q1FY20E, significantly lower than Rs 500 crore in Q1FY19.

In addition, inventory days as on June 30, 2019 were maintained at about 15 across stations, providing a positive outlook for PAF in the subsequent periods.

The CERC has maintained a regulated RoE of 15.5 per cent along with a cushion for coal GCV deterioration in its final tariff for FY19-FY24E.

On the capacity addition front, NTPC has already added 1.46GW (Gadarwara 800MW and Meja 660MW) during Q1FY20.

"We expect NTPC to add another around 3GW capacity in FY20E. We continue to expect a speedy conversion of CWIP into gross block, which should lead to RoE expansion (10.9 per cent in FY20E and 11.3 per cent in FY21E vs. 10.5 per cent in FY19) since the blocked equity in CWIP would start earning RoE," said the brokerage.

The brokerage maintain buy recommendation on NTPC with a target price of Rs 157 (1.1 time FY21E P/BV) and overweight stance in its sector EAP. Key risks remain any delay in capacity additions and subdued coal supply.