Weekly tactical pick: NTPC

August 23
08:25 2019

We are recommending NTPC as a good contra investment, considering that the market is excessively worried despite its improving fundamentals and the stock is trading at historical low valuations.

To put in perspective, NTPC has corrected in the recent past and at the current market price of Rs 116 a share, it is trading little less than 1 time FY21 estimated book value. What is more, at this price it is offering a dividend yield of over 5 percent. These are stressed valuations last seen during the down-cycles in 2009 and 2013.

Moreover, the market seems to be ignoring the improving fundamentals. During the June quarter, the company reported close to 500 basis points improvement in its plant load factor (coal based plants) and under-recoveries at Rs 110 crore were substantially lower than last year’s Rs 500 crore and what the market had anticipated.

The other important factor is that the coal availability is improving and it is able to fire its plants. Thus there was over 500-basis point jump in plant availability factor known as PAF.

Interestingly, while guiding the market and analysts, the management set reasonably good targets. This year, the company aims to add 5300 MW of capacity and another 5,000 MW by the end of FY21. A large chunk of its capital is stuck in ongoing projects or known as capital work in progress amounting to 42 percent of the invested capital in FY19. With this aggressive conversion (5000 MW of completion every years) it hopes to reduce this capital work in progress.

This capacity enhancements would essentially mean a 15 percent annual growth in its present regulated equity over the next three years. If it progresses well, regulated equity will jump to Rs 82,100 crore by FY22 as against Rs 54,000 crore in FY19. This is good news, considering that the market has built in very low expectations. This could bring in growth as well as drive its return ratios higher.Subscribe to Moneycontrol Pro and gain access to curated markets data, trading recommendations, equity analysis, investment ideas, insights from market gurus and much more. Get Moneycontrol PRO for 1 year at price of 3 months at 289. Use code FREEDOM.

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