Fundamentals are on the mend. Somehow, the market seems to be ignoring all that.
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 (5,000 MW of completion every years), it hopes to reduce this capital work in progress.These 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.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.