NTPC - Negatives Priced-in; Recovery Likely in H2FY13; Maintain "BUY - Karvy

NTPC has underperformed against Power Index declining 8% over 12 months. Its power plants' operating parameters are under pressure with PLF dropping by 300-400 bps due to lower system demand and fuel issues. We believe slower capacity addition and lower guidance have already factored in at low valuations of 1.5x FY14E P/BV.

PLF for Coal Stations likely to improve: Despite adding 2,800 MW NTPC in FY12, NTPC's gross generation in Q2FY13 grew by meagre 3.6% YoY to 52.4 bn units, due to fuel supply issues & maintenance-related shutdown at a few plants. Average PLF of its coal stations was 74.9% vs. 78.3% last year. In Q2FY13, coalbased stations received 32 mn MT up 25% YoY. Whilst low generation was the key concern for NTPC's stock performance earlier, the PLF for coal stations likely to improve on the backdrop of improved coal supplies from Coal India from 3QFY13, and company has initiated measures to import coal which should improve the coal PLF/PAF going ahead.

Expect Capacity to Ramp Up: 47% slippage from the capacity addition target 11th FYP has already been priced-in for NTPC, we expect NTPC would add 14GW in FY13-15E period. NTPC has already has placed orders for 11 GW projects while for 4.8GW it is targeting to complete equipment order tending by 4QFY13. Start of such Equipment tendering process could be positive for the stock performance.

No Risk of SEBs' Default: NTPC has a strong payment escrow security mechanism. In case of non-payment of receivables from the SEBs after 90 days grace period, NTPC can directly recover the dues from Central Government grants to the respective states. NTPC realized 100% payment of bills from the customers for 8th successive year.

Core RoE - Higher than CERC Norm: NTPC's pre-tax RoE of 21-27% is one of the highests due to operational efficiency and higher incentives with less risk of higher fuel prices. We expect regulated equity to grow from Rs. 330 bn to Rs. 584 bn by FY15E. We forecast core RoE of 19-20% for FY12-15E.

Outlook & Valuation

At the CMP, NTPC is trading at 1.6x and 1.5x its FY13E & FY14E P/BV, respectively, and at EV/EBITDA of 8x on FY14E. On the back of strong fuel security, robust balance sheet and regulated business, we reiterate our "BUY" recommendation on the stock with revised target price of Rs. 186 per share.

Key Downside Risks:

- Lower-than-expected capacity addition,
- Lower coal supply from CIL

Source : Equity Bulls

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