NTPC - Target Price Rs. 190 - GEPL Capital

NTPC is a government of India undertaking set up in 1975, which is India's largest power generation company with 41,000 MW installed capacity (including 5,400MW from JV's). The company plans to add ~14GW of capacity in the XII plan. In addition to generation, it also provides consultancy services and has a subsidiary named, NTPC Vidyut Vyapar Nigam, is engaged in power trading. Apart from this, NTPC has also entered into JVs for different businesses—with Singareni Collieries for coal mining, BHEL for equipment manufacturing, and Transformers & Electricals Kerala (TELK) for repairs and maintenance.

Ample of scope ahead with capacity increment from FY13 to FY17

With target capacity addition of around 7,700 MW in next 3 years, 2,000 MW projects are already under construction currently & during FY2012-13 NTPC added 4170 MW which is a highest capacity addition in any year. we expect a high growth period for NTPC in coming years as incremental power capacity to provide incremental earnings for the company. With better funds availability and declining concerns on receivables with fuel and power purchase adjustment mechanism, NTPC is thus better placed than other developers - both on the operational and the financial front.

Capacity to subside the fuel risk

NTPC has assured coal linkages for 90% of installed capacity and it is in better place due to its captive coal mines (Output is expected from current Financial year) to satisfy its additional coal demand also government has given in -principle approval for allocation of new coal blocks to company .NTPC is also in better place among its peers when it comes to import of coal due to its PPA which safeguard NTPC's interest in procuring coal from both domestic & international markets. Due to all such factors NTPC is able to subside risk of fuel unavailability.

Worst over, improvement in hindsight

NTPC has consistently reported PAF (Plant Availability Factor) of more than 90% against required 85%. We expect coal-based PAF to further improve in FY14 and FY15 to around more than 92% with increase in domestic coal production, contribution from captive coal mines and usage of imported coal as the inland waterways for coal transportation to Farakka and Kahalgaon stations get commissioned.

Scalable and de-risked business model

NTPC is abide by rules of CERC which has allowed to determined companies tariffs to recover a return of 15.5% on a pre-tax basis as per the tariff guidelines, also being Public utility company NTPC enjoy non-risk of competitive bidding for better part of FY12 which makes the company more attractive due to de-risking of its model.

No default Risk for NTPC In case of non-payment of receivables from any SEBs, NTPC can recover its dues from Central Government.

Successful OFS to boost public participation in the stock

The government of India (Promotor of the company) sold 9.5% stake, being 783.26 mn. shares in NTPC through OFS to bring their stake to regulatory requirement of 75%. Hence we don't expect any share sale program in near future to affect stock negatively.

Valuation

With the cash-rich balance sheet NTPC's plans to accelerate growth via investments in renewable, steady coal supply arrangements provides it an edge over its peers & expansion plans on hand will boost NTPC's earning ahead. At P/E of 10.6x and P/B of 1.4x in FY15E, NTPC is trading at inexpensive multiples, which is well below its six-year historical average PE of 16.2x and PB of 2.2x. The company's FY15e ROE of more than 13% is one of the best in the segment and is expected to only grow from there in future. Our TP implies P/B of 1.6x to arrive at target price of Rs. 190/Sh.

Source : Equity Bulls

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