NTPC to be key beneficiary of India’s power shortage, say analysts

• Market experts believe that NTPC is poised to benefit from the need to add capacity as the country continues to be in a power deficit.
• The public sector power generator has the ability to raise debt at significantly lower cost than private players to add capacity.
• News on listing of its green energy arm could be a key trigger for the stock.
  

Shares of NTPC, the country’s largest integrated power producer, have rallied 32% over the last six months. The power sector as a whole has come under a scanner as India’s peak power demand continues to outpace supply. Clearly, it is this demand and supply mismatch that is leading to higher investments in the sector too. While higher capacity addition is one trigger for the stock, value unlocking is the other. The company is looking to raise funds by listing its green energy arm called NTPC Green Energy Limited this fiscal.

The Central Electricity Authority of India has estimated the need to add 24GW of coal capacity (in addition to 27GW under construction) to meet the power requirement by FY32 as its base case scenario, says IIFL’s analyst team. NTPC looks like the obvious beneficiary of this capacity expansion.

Market experts believe that NTPC is poised to benefit from the need to add capacity. As such, management plans to commercialise 10GW of conventional power capacity and/16GW renewable power capacity over the next three years. The power company also plans to sign power purchase agreements for an additional 7.2GW coal capacity over the next 12-18 months to ensure India’s energy security.

According to IIFL, NTPC is also consolidating its coal mines into a 100% subsidiary (NTPC Mining Limited), through which it seeks to explore commercial mining options (coal, lignite, etc.). The company plans to expand its renewable portfolio (solar, wind, PSHP, C&I, etc.) to 60GW by FY32 (3GW installed till date), and targets a similar return profile like its thermal units for these RE projects.

Goldman Sachs came out with a note on India’s power sector a few weeks ago that believes that public sector power producers stand to benefit most from their energy transition and from higher power demand. For starters, given that India continues to be a power deficit country, NPTC will see valuations of its existing coal fired power business to get better valuations. In addition, the state run power producer can raise capital at lower cost than other producers. According to GS, state run power producers can raise debt at a cost that is 200-250 basis points cheaper than what private players can.

Further, according to GS, “The RE transition allows the PSUs to offload execution risk to EPC providers at the cost of sacrificing some EPC margins. This was the reason why a solar EPC provider like TPWR had to book provisions in FY 22-23 when solar module prices surged while PSUs which had awarded these contracts were largely protected.”

A lot of what was not working for NTPC so far is now turning into an advantage. Given environmental concerns, private players have been staying away from coal capacities. However, Indian authorities have green flagged more coal capacities in India as it continues to remain a power deficit country. The risk of this does not affect NTPC as it enjoys a cost plus model and has regulated returns as it is state-owned and its returns are determined by the government.

Many private producers face the risk of not being able to recover their cost from new coal fired power plants if the demand for power stops before the life cycle of the plant. But in the case of NTPC this is not the case as its customer is the government.

NTPC is expected to create value across its portfolio and not just the existing coal based assets. According to IIFL, the company is well positioned to benefit from the need to add capacity. What will make the stock volatile is the impact of news on tariffs.

Analysts believe that Central Electricity Regulatory Commission’s tariff regulations would impact NTPC’s share prices even though a cut in regulated returns for the producer is not anticipated. A key trigger for the stock would be news on the NTPC green energy IPO. The stock still trades “cheap” at 9.5x FY25 Price/Earnings multiple.