NTPC Rating: buy- A good end to fiscal for company NTPC’s Q4FY22 earnings/management commentary reaffirms our thesis of an improving earnings quality with thermal as the mainstay of India’s energy security. Key highlights: i) Q4 PAT a 15% beat despite 70% decline in LPS income – recouping `2-bn fixed cost under-recovery and better realisations. ii) Overdue debtors down 25%. iii) 6GW brownfield thermal expansion on the cards. iv) Targeting 80% growth in captive mines offtake in FY23E (FY22 growth at 30%). There are significant structural changes that could lead to a gradual re-rating of the stock – energy security, ESG focus, attractive valuations with the RE business at almost negligible valuations and under-ownership in the stock. Maintain ‘Buy’ and top pick status. 6GW thermal expansion on cardsGiven power demand-supply issues, there is a likely revival of medium-long-term PPAs. NTPC is expecting 6GW of brownfield thermal capacity expansion with an estimated capex of Rs 80-100 mn/MW on a regulated basis. It is likely to proceed with 1.3GW soon and expects EC clearance for others shortly. Despite ESG concerns, it does not expect any funding issues. On the RE front, there could be 0.9GW delay in RE commissioning due to BCD/GIB issues. Outlook: Going strong on all countsWhile thermal will remain the backbone of NTPC’s earnings growth trajectory, its transition towards new energy is rolling well. Further, it has restructured its RE business for future strategic sale/IPO, likely in FY23. The stock is trading at an attractive 1x FY24 P/B (RE business almost free). Maintain ‘BUY/SO’ with Rs 194 TP.
Services miss estimates; Software better than expected: Services business grew 0.6% q-o-q cc and missed HCLT’s Q3FY23 guidance, mainly due to a 3.8% q-o-q cc decline in the ER&D segment. Growth in the IT&BS segment moderated slightly to 1.6% q-o-qcc but was in line with estimates. BFSI and Life Sciences were the key growth drivers, while communications were the drag among verticals. Growth was led by the Americas region, while Europe and ROW posted declines.
Decline in bookings reflects delays in decision-making: HCLT won 10 large deals in services and three large deals in Software with net-new deal TCV of $2.1bn, down 8% y-o-y. Deal wins were driven by the services portfolio, were centered on cost optimisation and vendor consolidation and came mainly from BFSI, manufacturing and Life Sciences verticals. Management highlighted a ramp-down in discretionary spending in Hitech and communications verticals but pointed to a strong deal pipeline.
FY24 guidance in line with expectations: HCLT has guided for 6-8% y-o-y growth for overall business and 6.5-8.5% y-o-y cc growth in services segment and 18-19% margins in FY24—all in line with our assumptions. We maintain our FY24-25 cc revenue growth and margin estimates and expect HCLT to deliver 6.5% cc revenue growth and 18.4% margins in FY24. However, we lower our earnings forecasts by 2% to factor the higher tax rate indicated by the management.
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Raise PT: HCLT has fared better in Q4, particularly in North America and BFSI, unlike its peers. However, rising demand uncertainty as a US recession nears remains a concern. HCLT’s stock at CMP trades at 17x PE and offers a 5% yield, which in our view should limit downsides and derating. Hence, we raise our target PE to 17x (16x earlier) and raise our PT to Rs 1,125, offering 8% potential upside.