Stock pick of the week: Reasons why NTPC's growth is set to accelerate

Analysts are getting increasingly bullish on NTPC because the Central Electricity Regulatory Commission (CERC) has decided not to bring down the regulated return on equity (RoE) of government power companies from the existing 15.5%. The market was expecting the regulator to cut the RoE by about 150 basis points.

Another positive in the regulator’s draft norms for 2019-24 is the reduction in plant availability factor (PAF)—the period for which a plant is operational—from 85% to 83%. Besides reduced PAF, the exclusion of maintenancerelated shut downs from the computation of PAF will make it easy for NTPC now to maintain the minimum PAF needed to claim the regulated RoE.

One slightly adverse proposal in the CERC draft is the reduction in the residual value of plants that are more than 25 years old. Residual value is the value of a project’s assets at the end of a given period. While the residual value was kept at a constant 30% for older plants, it will now be cut to 10% of a plant’s cost.


How will this affect NTPC, which has a large number of old plants? The impact won’t be significant because most of NTPC’s older plants are efficient and, therefore, not dependent on regulatory RoE for achieving break even, say analysts. Also, since all its old plants have large tracts of land, developing brown field capacity will be easy for NTPC, given its strong balance sheet.

NTPC was growing relatively slowly, at around 8% per annum, over the past few years, but growth is expected to improve to around 12% due to commissioning of new plants and related growth in its regulated equity base. With regulatory tariff-related overhang behind NTPC, analysts are focusing on the company’s future plans.

The recent firm-up in power tariff is another positive for NTPC because analysts believe that it is more structural in nature. The company is not looking at greenfield expansion because of land acquisition-related delays and cost overruns. Instead, in addition to brownfield expansion, NTPC is expected to bid for some stressed assets of other power players that may be put on sale through the National Company Law Tribunal route. NTPC plans to bid for plants based on low valuation, proximity to mines, low landed cost of fuel, and given the plant hasn’t signed any power purchase agreement.

Analysts’ views
Buy: 27
Hold: 2

After underperforming the broader market, the power sector is expected to make a comeback and, therefore, it makes sense to invest in strong players such as NTPC, which is quoting at reasonable valuations.

Selection Methodology
We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts.