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Research
NTPC - Swimming against the tide - Antique
Posted On : 2013-06-22 00:44:35( TIMEZONE : IST )
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 BUY 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 two years. We expect NTPC to commercialise 8.2GW of new generation capacity (8.1% CAGR over FY12- FY15e), translating into standalone earnings CAGR of 9.2% 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. 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.
Valuation and outlook
NTPC is currently trading at P/B of 1.3x and 9.9x PE on FY15e 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.
