NTPC is Up 40% in 2023. Does This Value Stock Have Room to Rise?

Last week, our team wrote about ITC share price and whether the value stock still has enough room to run.

Adding to the list of value stocks outperforming the market is NTPC, which is turning out to be an outlier.

The stock is up 41% in 2023 so far.

The rally is driven by multiple factors including good fundamentals, its big leap in the green hydrogen space, among other reasons.

But beyond its financial success, NTPC is also recognised for its commitment to sustainability.

India's largest energy company no longer wants to be known just as a coal-guzzling power producer.

And the other big reason for the surge in stock price comes from the simple fact that power stocks have been trading at bargain prices.

On top of that, NTPC has also been a dividend paymaster, clocking in a 5-year average dividend yield of 4.6%.

Factors Driving the Rally

Reportedly, five out of the six largest dividend yield funds have shown a notable increase in their exposure to power stocks.

And it looks like NTPC has been their go-to option.

Mutual Funds Exposure in NTPC Going Up

This could be due to the simple fact that the market is anticipating a healthy improvement in the power sector with a better demand scenario.

The sector is heavily co-related to the country's economy, and India as you know, has staged a strong comeback in its post Covid-recovery.

The official data reported by the Central Electricity Authority (CEA) shows that electricity demand has yet again hit a record peak after over a decade. Peak electricity demand reached 238,191 megawatts (MW) in August 2023.

This was due to a shortage of rain and humid climate conditions. There was even load shedding in certain parts of India.

NTPC's relatively strong FY23 and June 2023 earnings only reaffirm this strong belief of healthy improvement in demand.

In its latest earnings, the state-run power generator reported a substantial 20% increase in operating margins compared to the corresponding period of the previous year. This was due to the fact that NTPC's domestic coal-based power plants played a big role as imported coal became unviable.

The closure of approximately 8.6 GW (4.5% of India's coal capacity) of power plants in Mundra, primarily due to the unviable costs of imported coal, resulted in a mini-energy crisis in certain parts of the country.

What used to be a drag for NTPC is turning out to be a big advantage for it now. Indian authorities have recently green flagged more coal capacities as India continues to remain a power deficit country.

If we look at its FY23 performance, NTPC posted record profit of Rs 172 billion (bn). It also set a new record in realisations which came in at Rs 1.54 trillion (tn).

NTPC has the advantage of churning revenue from multiple streams. The company is actively exploring opportunities in industries including green hydrogen, nuclear power, green charcoal, green chemicals, among others.

NTPC Financial Snapshot

Data Source: Ace Equity

So you see...apart from rising demand, there are several other reasons at play which could keep NTPC's stock in demand for a long time to come.

Some obvious reasons also include India's ambitious thrust towards the electric vehicle (EV) sector, revamping of infrastructure sector and the ongoing electrification of railways sector.

On top of this, the government is leaving no stones unturned and laid out several policy reforms aimed towards the power sector's growth.

To meet India's 500 GW renewable energy target and tackle the annual issue of coal demand-supply mismatch, the Ministry of Power has identified 81 thermal units which will replace coal with renewable energy generation by 2026.

The government has also mandated utilities to procure a minimum purchase of renewable power, made massive investments in transmission infrastructure, and helped reduce project development and land acquisition risk for solar parks.

The centre is consistently introducing production-linked incentive (PLI) schemes, renewable manufacturing zones, and a slew of other initiatives to achieve self-reliance (Atmanirbhar) in the renewable energy sector.

As we said, the rally is driven by a lot of factors which don't seem to be going away anytime soon.

What About Valuations?

At the current price of Rs 237, the company trades at a PE multiple of 12.3x and a price to book value multiple of 1.6x.

This compares with its historical 5-year average PE of 8.6x and a 5-year average P/BV of 1.1x.

The stock's current PE and price to book value multiples does not make it very expensive but it certainly puts it out of the comfort zone of many die hard value investors.

Historical Valuations of NTPC

	FY19	FY20	FY21	FY22	FY23
PE Ratio	9.8	7.2	7.1	7.9	10.1
Price to Book Value	1.2	0.7	0.8	1.0	1.2
Dividend Yield	4.5	3.7	5.8	5.2	4.1
Marketcap/Sales	1.4	0.8	0.9	1.0	1.0

Data Source: Ace Equity

The industry average PE stands at 16x, and industry average P/BV comes to 2.3x.

In some ways, this also shows that NTPC still has some room to grow and is yet to catch up with its peers.

On top of this, the company offers a dividend yield of over 3% at the current price.

Comparative Analysis

Company	NTPC	Adani Power	Power Grid	Tata Power	Torrent Power
ROE (%)	12.1	44.2	19.4	14.9	20.7
ROCE (%)	9.8	15.8	13.0	13.3	19.1
Latest EPS (Rs)	19.4	38.1	16.6	11.0	44.4
TTM PE (x)	12.1	10.1	11.6	22.9	16.2
TTM Price to book (x)	1.5	3.9	1.5	2.8	3.0
Dividend yield (%)	4.1	0.0	5.8	0.8	3.6
Industry PE	18.3
Industry PB	2.5

Data Source: Ace Equity

In Conclusion

Though we can't give any buy or sell recommendations throughout this article, we'll leave you with this...

The Indian power sector offers a promising landscape for investors looking for stocks with strong earnings growth potential.

It's clear from the reasons we mentioned above that NTPC could continue to grow earnings if all goes well, and it implements programs on a timely basis. If it does grow earnings as expected, we cover see the company declaring even higher dividends.

It also has ambitious green hydrogen plans in place, which could turn out to be the game changer.

One more aspect is the value unlocking that might happen once its green energy arm gets listed. NTPC is looking to raise funds by listing its renewable energy arm - NTPC Green Energy, this financial year.

Hopefully, this editorial made each of you think more deeply about what's happening with NTPC.

Feel free to share your views in the comments section below.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...