Weekly Tactical Pick | Improving operating parameters to drive higher earnings

At the current market price of Rs 149 a share, NTPC is trading at 1.1 times its price to book value of FY19 estimates, which very attractive

The Central Electricity Regulatory Commission (CERC) recently released draft norms for the power sector reducing the plant availability factor (PAF) threshold to 83 percent as against 85 percent earlier. Additionally, the draft also says that the plant shut down for the maintenance would not be included for the purpose of calculation of the PAF, which typically reduce the PAF by about 6-7 percent. Relaxation in the PAF would mean the companies would be able to avail incentives that are offered in terms of higher return on equity (RoE) on the regulated equity. Regulated equity is the net worth that is deployed in the operational power generation projects, which avail fixed RoE.

Key beneficiary

This brings good news for NTPC that is sitting on regulated equity close to Rs 51,000 crore. Moreover, the company and shareholders get huge big relief as the regulator kept the RoE unchanged. This was a big overhang for its stock as investors were fearing that in the falling interest rate scenario the regulator would cut the RoE offered on the regulated equity. While this would improve the operational efficiencies and return ratios, NTPC should also benefit because of the improving earnings visibility. It has expressed its intention to buy a few power plant thus utilising its cash in the books. This is in addition to its plans to add another 20000 MW of capacity in the long run including 5000 MW each in the year 2019 and 2020.

Attractive valuations

Among utilities, NTPC is the most stable company having extensive experience and strong balance sheet. Moreover, at the current market price of Rs 149 a share, it is trading at 1.1 times its price to book value of FY19 estimates, which very attractive.  The stock offers a close to 4 percent dividend yield. Out of 28 analysts (based on consensus) tracking the stock 26 of them have a buy and outperformer rating on the stock with an average target price of Rs 191 a share, which is about 28 per cent higher compared to its current market price.

Source: https://www .moneycontrol.com/news/business/moneycontrol-research/weekly-tactical-pick-improving-operating-parameters-to-drive-higher-earnings-valuations-for-ntpc-3314221.html  

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