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NTPC Limited - Swimming against the tide

In the backdrop of factors like fuel unavailability, unviable power purchase agreements, regulatory hurdles; independent power producers still face significant investment risk. These industry wide concerns along with the delays in the implementation of power reforms have also impacted valuations of regulated players like NTPC. We believe the current market price is not taking cognizance of the growth in capacity and regulated nature of the business. We recommend subscribe to NTPC OFS as fuel availability improves and capacity addition remains stable.

Capacity acceleration to translate into earning growth

NTPC is expected to witness acceleration in earnings on the back of increase in capacity addition over the next three years. We expect NTPC to commercialise 7.7GW of new generation capacity (7.7% CAGR over FY12-FY15e), translating into standalone earnings CAGR of 11.8% over FY12-15e. We expect 75% of the capacity addition to be front ended till FY15e due to the slippages in the XIth FYP.

Regulatory earnings provide stability: Existing as well as assets under construction for NTPC will operate on a regulated basis for a foreseeable future. NTPC remains on firm footing with 107GW of regulated PPA in hand. We believe concerns on receivables has decreased with 21 states issuing tariff order for the current fiscal year and introduction of fuel and power purchase adjustment mechanism on a regular basis.

Best suited to ride fuel supply risk

Despite concerns of domestic coal availability and tepid growth in Coal India output, NTPC has been able to receive coal at 100% of ACQ against LoAs. PAF for 2QFY13/3QFY13 suffered due to delays in imports and we believe with Coal India ramping up production and NTPC awarding the final import tender of 7mmt, company is geared to increase the availability in 4QFY13e.

Operational metrics at bottom; set to improve considerably

NTPC has consistently reported PAF of ~91% against normative norms of 85%. We expect coal-based PAF to improve in FY14e/FY15e to 90%/92% from ~87% in FY13 with increase in domestic coal production and usage of imported coal as the inland waterways for coal transportation to Farakka and Kahalgaon stations get commissioned. We expect NTPC to import coal of ~24mmt and ~25mt in FY14e and FY15e, respectively.

Recent positive events

NTPC has been re-allocated the Kerandari, Chatti Bariatu and Chatti Bariatu (South) coal blocks (de-allocated in June 2011). The Government of NCT of Delhi has paid NTPC INR 25.2bn (INR8.4bn as principal and INR17bn as interest) as settlement of dues from DESU.

Valuation and outlook

NTPC is currently trading at P/B of 1.5x and 10.8x PE on FY14 earnings, which is at the lowest band of its valuations reflecting concerns which we believe is unjustified given that the earnings of regulated entities are shielded to a large extent from industry wide concerns. We recommend subscribe to OFS.

Source : Equity Bulls

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