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NTPC - Showcase of strength & competitiveness - ICICI Securities

Posted On: 2020-11-25 06:10:12 (Time Zone: Arizona, USA)

In a significant development in renewables space, solar tariff in SECI's latest round of bidding plunged to its lowest ever at Rs2/unit. NTPC emerged as a big winner securing 470MW at Rs2.01/unit. As per our initial estimates, cost/MW for this project should range at Rs40-42mn resulting in 12-14% IRRs. This bid win reaffirms NTPC's competitiveness in the RE space amongst global peers, as it continues its journey to become a cleaner and greener company. Further, in recent interactions with investors, NTPC's CMD Mr Gurdeep Singh indicated willingness to unlock value of NTPC's green assets through a renewables platform. He also maintained that dividend policy (higher of 5% of net worth or 30% of profits) remains intact and optimising shareholder returns is important. Maintain BUY.

- NTPC ups its game in RE space: During the latest round of SECI auctions, NTPC emerged as a winner for developing 470MW bidding tariff of Rs2.01/unit. As per our initial estimates, cost/MW for this project should range at Rs40-42mn resulting in IRRs ranging at 12-14% (including innovative financing), helped by a decline in average cost of debt to 6.37% in H1FY21 (vs 6.91% in H1FY20) and tax breaks (tax rate at 15%), since the project will be set up under a new company (NTPC Renewable Energy). Currently, owned operational RE capacity is 1,070MW, 2,404MW is under construction and 2,088MW under various stages of tendering. Through developer mode, 3,983MW is commissioned, 1,400MW under construction and 1,170MW under various stages of tendering.

- Solar tariffs plunge further: Rs2/unit is the lowest tariff discovered till date, significantly lower than previous tariff discovery of Rs2.36/kWh for 2GW in Jun'20. In this round, SECI received bids from 14 companies for 4.35GW (tender was oversubscribed by 3,280MW). In fact, eight quotes were below the previous record low of Rs2.36/kWh. The projects will be set up on a build-own-operate basis, interconnected with the nearest substation of the state transmission utility. Winners of the round were: 1) Aljomaih Energy & Water Company (Saudi Arabia) - 200MW at Rs2.0/unit, 2) Sembcorp (Singapore) - 400MW at Rs2.0/unit and 3) NTPC - 470MW at Rs2.01/unit. We believe the reason for further decline in tariff is mainly due to - 1) development cost of ~Rs0.13/unit being waived off by Rajasthan (which is both the developer and buyer in this case); 2) lower interest rates; 3) no inclusion of BCD/ safeguard duty (currently inapplicable and will be a pass through if applicable at a later date under change in law; may potentially add another Rs0.20/unit).

- Evolution of NTPC into a cleaner and greener company is taking shape: NTPC is striving to increase the pie of its capacity mix more in favour of 'clean' sources, i.e. renewables (solar, wind, hydro) and gas from ~17% currently to 40.2% in FY32, as a part of its transition to become an integrated power company, and this bid win reaffirms its efforts. We believe NTPC is taking huge strides to transform itself into a company with cleaner coal assets, higher share of renewables and greater focus on all ESG parameters. Although this transition will be over the next decade, it will require huge investments, which, without external support, only cashflows from the company's current basket of assets will be able to fund. Thus, current thermal technologies will continue to play a vital role of both supporting power demand and funding future green technologies.

- Maintain BUY: With adjusted EPS for standalone/consolidated entity at Rs7.4/Rs8 in H1FY21, we believe NTPC is on course to achieve FY21E target EPS of Rs12.3/Rs14. We maintain BUY with an unchanged target price of Rs165/share. The stock is currently trading at FY22E standalone P/BV of 0.7x (P/E of 5.7x) and consolidated P/E of 5.1x.

Shares of NTPC LTD. was last trading in BSE at Rs.93.9 as compared to the previous close of Rs. 94.2. The total number of shares traded during the day was 1257117 in over 5279 trades.

The stock hit an intraday high of Rs. 94.9 and intraday low of 92.85. The net turnover during the day was Rs. 118130012.

Source: Equity Bulls

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