NTPC To Go Slow On Capacity Additions, Returns Look Weak

After the recent directive of the Central Electricity Authority (CEA), which said that the power companies should not plan any gas-based capacity in the next 5 years on the back of the depleting gas production in the country, NTPC has decided to halt its plans to expand its gas-based power plants. NTPC has also set up an aggressive target of a total installed capacity of 1,28,000 MW by 2032. In light of these developments, we, at DSIJ, tried to assess whether one should invest in this stock from the long-term perspective.

NTPC has a total installed capacity of 36,014 MW, of which 84% (i.e. 30,199 MW) is based on coal and 16% (i.e. 5,895 MW) is based on gas. The company operates a total of 8 gas-based power stations, of which 7 are owned by it and 1 is owned through a joint venture.

NTPC's Gas-Based Stations

The company has set up a huge capex of Rs 2,15,000 crore for the next 5 years. It is also aiming for a total generating capacity of over 1,28,000 MW by 2032, which includes 56% coal-based, 16% gas-based, 11% nuclear and 17% renewable capacity. However, due to the gas shortage, NTPC will have to stop the earlier planned gas-based capacity of 8,000 MW. Its plans of adding 2500 MW of capacity every year in the next Five Year Plan will also take a beating due to the current gas shortage scenario. We are skeptical over its aggressive capacity addition target, as a total of 14,585 MW of gas-based planned capacity is under threat due to the gas crisis.

This apart, the coal-based capacity will see a fuel risk on the back of the coal shortage in the country. NTPC has a potential to emerge as a major beneficiary if Coal India starts signing fuel supply agreements with power companies, as per the Prime Minister’s instructions. Coal India has raised concerns over the clause of financial penalty if it fails to deliver 80% of the contracted coal quantity. Besides, the PM has also asked the company to import coal to meet the demand in the country. We believe that coal imports will eat into Coal India’s profits, and hence, this is not a viable option. Under such circumstances, we are skeptical of the performance of NTPC’s power projects, even if it adds the said capacity.

In the last 5 years, the country has only added 53,922 MW of power generation capacity, which is 69% of the targeted original capacity (78,700 MW) and 87% of the revised target of 62,000 MW. We believe that there is a good chance that NTPC may miss the target capacity of 1,28,000 MW by 2032.

Currently, the investor sentiment on the sector remains weak. Profitability seems very inconsistent. NTPC has grown by 16% in the topline and merely by 6% in the bottomline in the last 5 years. Its net profit margins have also come down from 22% to 14% in the 5 years’ period.  Considering all these factors, we are not bullish on the scrip and advise investors to avoid the scrip.