Shares of National Thermal Power Corporation (NTPC) gained on May 27 as brokerages maintained bullish calls on the stock despite the PSU reporting below-estimate earnings for the quarter ended March 2024.

Morgan Stanley has maintained its 'overweight' call on NTPC, setting a target price of Rs 390 per share. The brokerage noted that the company's recent earnings report fell short of estimates primarily due to fixed cost under-recoveries.

Its consolidated profit after tax (PAT) was also below expectations, largely driven by reduced profit contributions from subsidiaries.

Despite this, the company boasts a robust renewable energy (RE) portfolio, totaling 23.2 GW, said Morgan Stanley, adding that there is speculation that a renewable energy (RE) IPO could be on the horizon, possibly occurring by October or November 2024.

At 9:18 am, NPTC shares were trading around a percent higher at Rs 378.40 on the National Stock Exchange (NSE).

India's largest integrated power utility's consolidated net profit for Q4FY24 jumped 33 percent on year amid higher power demand due to scorching high temperatures in the country.

The state-run company's revenue from operations also rose over 7 percent YoY in the March quarter. The company’s power generation and coal production also increased in the period.

According to analysts at Nuvama Institutional Equities, NTPC is a distinctive play on thermal demand and transitioning towards renewable energy, aided by its size and profitability. Thermal is still the mainstay but all future capacity addition is based on renewable energy with a target of 6GW per annum, it noted.

"NTPC currently has most of its operational capacity (standalone) under the regulated model. This enables it to pass on an increase in costs, limiting the impact on profitability," the brokerage said.

According to Nuvama analysts, NTPC’s thermal profitability shall likely improve, given: i) no significant fuel-based under recoveries; ii) improving PLFs; iii) accelerated commissioning; and iv) higher incentives.

NTPC’s RE focus is the mainstay given its unique advantage of leveraging its thermal plants to blend in RE; ready access to human and financial capital; and risk framework, which protects against the downside.

"Further, the thermal giant’s transition towards new energy encompasses decarbonization of industrials and mobility, not just RE.

While the existing business earns regulated RoEs of 18-19 percent on invested equity (including incentives), the RE capex is on a competitive bidding basis, wherein NTPC enjoys a 1–1.5 percent lower cost of debt (versus private sector peers) given its balance sheet size and near-sovereign status. "This enables higher IRRs despite competitive tariffs," said Nuvama.

Given NTPC’s 25 percent share in India’s power generation and the country’s plan to add 30–40GW of RE a year, Nuvama argues that NTPC is poised to maintain its market share without requiring external equity.

The domestic brokerage maintained its 'buy' rating on the stock but revised the target price upwards to Rs 435 from Rs 367 earlier.

Key risks for NPTC

• 1- Delay in project execution: Any delay in the execution of pipeline projects could result in a downside from the estimated earnings/valuations.

2- SEB delays: NTPC earns a surcharge on the overdue from the SEBs. However, given the SEB’s critical financial health, there could be some risk of waiver in the future. Nuvama sees a low probability of this being crystallized though.

3- Fuel supplies: Fuel non-availability could affect PAFs leading to higher-than-estimated fixed cost under-recoveries impacting RoEs. This could lower regulated returns by 15.5 percent in 2024-29.