Maintain ‘buy’ on NTPC as it ups its game in RE space

In a significant development in renewables space, solar tariff in SECI’s latest round of bidding plunged to its lowest ever at `2/unit. NTPC emerged as a big winner securing 470MW at `2.01/unit. As per our initial estimates, cost/MW for this project should range at `40-42 million resulting in 12-14% IRRs. This bid win reaffirms NTPC’s competitiveness in the RE space amongst global peers, as it continues its journey to becoming a cleaner and greener company.

Further, in recent interactions with investors, NTPC’s CMD Gurdeep Singh indicated a willingness to unlock the value of NTPC’s green assets through a renewables platform. He also maintained that dividend policy (higher of 5% of net worth or 30% of profits) remains intact and optimising shareholder returns is important. Maintain ‘buy’.

NTPC ups its game in RE space. During the latest round of SECI auctions, NTPC emerged as a winner for developing 470MW bidding tariff of `2.01/unit. As per our initial estimates, cost/MW for this project should range at `40-42 million resulting in IRRs ranging at 12-14% (including innovative financing), helped by a decline in an average cost of debt to 6.37% in H1FY21 (vs 6.91% in H1FY20) and tax breaks (tax rate at 15%), since the project will be set up under a new company (NTPC Renewable Energy). Currently, owned operational RE capacity is 1,070 MW, 2,404 MW is under construction and 2,088 MW under various stages of tendering. Through developer mode, 3,983 MW is commissioned, 1,400 MW under construction and 1,170 MW under various stages of tendering.

Solar tariffs plunge further: `2/unit is the lowest tariff discovered till date, significantly lower than previous tariff discovery of `2.36/kWh for 2GWin June 2020. In this round, SECI received bids from 14 companies for 4.35 GW (tender was oversubscribed by 3,280 MW). In fact, eight quotes were below the previous record low of `2.36/kWh. The projects will be set up on a build-own-operate basis, interconnected with the nearest substation of the state transmission utility.