We are recommending NTPC as a weekly tactical pick. NTPC has seen some positive news flow in the past few months with the introduction of favourable regulations by the government, thereby helping the public utility to improve profitability and remove regulatory overhang on the sector.
The market was excessively worried about its demand outlook and availability of coal. However, these worries are now easing with the management being assured of higher coal supplies, thus reducing its cost and improve profitability. With these initiatives, the company will be able to improve its return on equity (RoE) marginally and report better cash flows.
Improving revenue visibility
Demand in the generation market is gradually picking up as seen in the spike in spot market rates. Moreover, some of NTPC’s projects, which faced delays in the last fiscal or before, are about to get commissioned in the current fiscal. This should ensure high capacity availability and utilisation at a time when the market is consolidating or there are no major projects coming up in the country.
Attractive valuationsIn terms of valuations, as well, the stock is trading at historically low levels. At the current market price of Rs 134, NTPC is trading at 1.2 times its estimated FY20 book value, which is reasonable considering its improved fundamentals and a healthy dividend yield of close to four percent.
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