Buy NTPC; target of Rs 165: Motilal Oswal

Motilal Oswal's research report on NTPC

Standalone (S/A) 1QFY20 adj. PAT decreased ~9% YoY to INR27b (14% miss on our est.). PAT has been adjusted for est. INR1.1b under-recovery (u/r) of fixed charge (FC) for this quarter. The miss is due to an impact of DSM regulations (~INR1.5b), carpet coal loss (~INR1.5b) and tax leakage on change in deferred tax recognition. Reported PAT, though, was up ~1% YoY to INR26b on lower FC under-recovery and higher other income, which jumped 2.4x YoY to INR3.3b on accrual accounting of late payment surcharge, in our view. New regulations for DSM (deviation settlement mechanism), which had tightened operating norms (since Jan'19), impacted the company's profitability (~INR1.5b). These norms, though, have largely been reversed (since May-end), and subsequently, such an impact is unlikely to continue. Lower inventory levels at some of the company's plants also resulted in the usage of older coal inventory, resulting in a loss of ~INR1.5b. The re-adjustment of DTA as income under regulatory balances (v/s being offset from DTL, earlier) resulted in a tax leak of ~INR0.8b, in our view. We believe that FC u/r declined to an est. INR1.1b v/s INR4.9b on restart of Unchahar and better coal availability at Mauda.

Outlook

We expect capitalization to pick up pace, thus, driving regulated equity CAGR of 16% over FY19-21E; it should also outpace capex and boost RoE. Our DCF-based TP is INR165/share. Maintain Buy.

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