NTPC Ltd. 19 th August 2011

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1 CMP Rs. 174 Recommendation: Accumulate Target Price Rs.189 Sector: Power & Utilities Key data Market Cap (Rs. Cr.) 143,306 Free Float Factor Week H/L 222/164 Avg 12M volumes ('000) 2,737 Face Value 10 Bloomberg NTPC IN Reuters NTPC.BO NSE NTPC BSE Shareholding pattern as of Jun' 2011 Promoters 84.50% FII's 3.54% DII's 8.30% Others 3.66% NTPC SENSEX (Rebased) Q1 FY12 Result Update NTPC Ltd s (NTPC) Q1 FY12 revenue was higher by 12% YoY to Rs.14,524 crores despite higher planned maintenance and lower offtake by State Electricity Boards (SEB). The average realisation stood at Rs.2.77/unit, up 12% on YoY basis and power generation units declined by 2% YoY to 54.6bu. Q1 FY12 EBITDA grew by 12% YoY to Rs.3,218 crores despite increase in fuel cost (up 12% YoY at Rs.9,750 crores) and other expenditure (up 15% YoY at Rs.865 crores) during the quarter. On YoY basis, EBITDA margin stood flat at 22.2% in Q1 FY12. Compounding the operating performance during the quarter, by lower depreciation (down 6% YoY at Rs.641 crores) and higher other income (up 26% YoY at Rs.644 crores), PAT grew by 13% YoY to Rs.2,076 crores in Q1 FY12. On YoY basis, PAT margin stood flat at 14.3% in Q1 FY12. EPS stood at Rs.2.5 in Q1 FY12 as against that of Rs.2.2 in Q1 FY11. Valuation At current market price of Rs.174, the stock is trading at P/BV of 1.93x its FY12E Book Value of Rs.90 and 1.77x its FY13E Book Value of Rs.98. We value the stock at a multiple of 2.1x its FY12E Book Value and arrive at target price of Rs.189 a share. On our target of Rs.189, we see a limited upside potential of 9%. NTPC is the largest power producer in India, and with huge demandsupply mismatch in the sector the company will be a bellwether in sketching India s Infrastructure growth story. NTPC is thus a very strong Accumulate and can be a value protector in the current volatile market. Kavita Jogani (Analyst) kavita.jogani@sihl.in Ameya Hardas (Research Head) ameya.hardas@sihl.in 1 P a g e

2 Key Positives Repossession of Cancelled Captive Coal Mines Ministry of Power s Support NTPC s management is confident of repossessing the cancelled captive coal mines by Ministry of Coal; basing its claim on significant progress made by NTPC towards the development of mines. The power ministers too showed confidence regarding the same, at NTPC s Analyst Meet held recently. By 2017, NTPC aims at an aggregate coal production of 47 MTPA from the allotted 5 coal blocks. Repossession of coal mines will assure consistent coal supply for its capacity additions, which is positive for the company s performance in long term. Robust PPA Portfolio Under the cost plus ROE model, NTPC has secured PPAs of 100,000 MW with most of the state distribution companies. In the current scenario of tariff-based competitive bidding in the Indian power sector, where increasing fuel cost is a major concern for financial sustainability of power generation companies, NTPC s ROEbased PPAs will enable the company to pass fuel costs to its consumers. We believe that the humongous portfolio of PPAs will shield NTPC s earnings from severe shortfall, due to rising fuel costs and declining power realisations. Fuel Cost NTPC s average fuel cost increased from Rs.1.28/unit in FY08 to Rs.1.78/unit in FY11. In Q1 FY12, the average fuel cost amplified to Rs.1.99/unit. The company s average fuel cost will further go up in case of any price hike by Coal India Ltd (CIL). In addition, with the increase in imported coal prices by 24% YoY to $117/tonne in August 2011, We anticipate NTPC s fuel cost to rise by 12% - 15% YoY in FY12E. As fuel cost is pass-through, the company will not be impacted. The company plans to blend up to 30% imported coal at few plants in the long term. NTPC currently blends 7% - 20% imported coal across its power plants. NTPC s average imported coal blending during FY11 was 7.8% as against that of 6.5% in FY10. Management disclosed that the additional cost for increased blending of imported coal was 26 paisa per unit of power generated in FY11 which may further go up to paisa per unit in case average imported coal blending increases to 10%. On implementation of the planned strategy of increase in use of imported coal, We expect NTPC s average fuel cost to increase, but will not severely impact company s profitability, as its fuel cost is pass-through. Equipment Ordering- Tenders NTPC has invited bid for 16,192 MW, of which management expects to conclude bulk tender for 14,460 MW (that includes boilers and turbines for eleven 660 MW sets and nine 800 MW sets) by the end of FY12. All the requisite clearances are attained for 660 MW units while environmental clearances for 800 MW units are expected to be received very soon. Management also expects a favourable outcome with regards to the boiler bulk tender case filed by Ansaldo Caldaie India (ACI), an Italian subsidiary of Gammon India, currently pending with the Supreme Court. NTPC had disqualified ACI from supplying 660 MW supercritical boilers on the grounds that it does not have the competence to supply evaporator (water wall), a critical component in boilers. ACI said supplying selfdesigned evaporators was not mentioned as a qualifying criterion in the NTPC notice inviting tender. Rapid placement of equipment orders will assist the company in timely execution of the new capacities, which is positive for the company s performance in long term. 2 P a g e

3 Key Challenges Plant Maintenance & Back Down by SEBs In Q1 FY12, coal-fired power plants operated at a comparatively lower PLF of ~87% as against ~90% in Q1FY11. Decline in Q1 FY12 PLF was led by planned shutdown of coal-fired power plants (causing a YoY decline in PLF by 100bps) and back down by SEBs (causing a YoY decline in PLF by another 100bps) during the quarter. Due to lower off-take by SEBs, NTPC s generation from coal-fired power plants was lower by 1.36bu in Q1FY12. SEBs poor financial health continues to pose a risk of lower off-take of power in the near term. However, State Governments have agreed to take various initiatives to improve the financial health of SEBs as part of power sector reform agenda. State Governments approved that tariff revision petition filed before the State Electricity Regulatory Commission (SERC) will not only take cognizance of the increase in power purchase costs of distribution companies to reduce the losses of these companies but also generate internal surpluses to finance expansion and maintenance of their network. Furthermore, State Governments would ensure automatic pass-through in tariff for any increase in fuel cost by incorporating the same in the regulations, as provided in Section 62(4) of Electricity Act, Implementations of various policy decisions at State Government level has always been a sticky issue and a tough job. Gradual improvement in the health of SEBs resulting in steady off-take of power is expected to eventually benefit NTPC. Overseas Acquisition NTPC's has been scouting opportunities of overseas coal mines acquisition to fuel its capacity expansions. However, the company s plans have been stalled due to high valuations and proposed policy amendments in Indonesia and Australia that is expected to soar up coal prices. The production cost of Australian coal is expected to go up as Australia plans to levy carbon tax of AUS$23 ($24.79) per tonne of carbon emitted from July 2012 and Indonesia is set to link the price of coal exported to international coal indexes this year, implying a substantial increase in coal prices going forward. Anticipated increase in coal prices have resulted in substantial escalation of acquisition costs. Despite NTPC s Maharatna status (that allows autonomy to the company to decide on investments of maximum 15% of its net worth in a project, investment ceiling at Rs.5,000 crores), the company was a non-starter and the current scenario of rising acquisition costs places NTPC's plans of overseas coal mines acquisitions on the back burner. This lessens the probability of easing of fuel supply for capacity additions, unfavourable for the company s execution of expansion plans. Grossing-Up of ROE During Q1 FY12, ROE was grossed-up at corporate tax rate. However, NTPC s Management anticipates application of MAT rate for the whole year FY12. This implies that certain reversal of revenue will take place in the last quarter of FY12 when NTPC resets its full year tariff. 3 P a g e

4 Exhibit 1: Standalone Income Statement (Quarterly) Particulars (Rs. crores) Q1 FY11 Q4 FY11 Q1 FY12 QoQ YoY Revenue 13,006 15,978 14,524-9% 12% Total Expenditure 10,139 11,700 11,305-3% 12% Fuel Cost 8,702 9,726 9,750 0% 12% Employee Cost % 1% Other Expenditure % 15% EBITDA 2,867 4,277 3,218-25% 12% Depreciation % -6% EBIT 2,185 3,579 2,577-28% 18% Interest % 10% Other Income % 26% PBT 2,353 3,257 2,847-13% 21% Tax % 51% PAT 1,842 2,782 2,076-25% 13% EPS, Rs % 13% Exhibit 2: Margins Particulars (Rs. crores) Q1 FY11 Q4 FY11 Q1 FY12 QoQ (bps) YoY (bps) EBITDA margin 22.0% 26.8% 22.2% PAT margin 14.2% 17.4% 14.3% Exhibit 3: Quarterly Break-up of Revenue 5% 14% 3% 4% 3% 3% 4% 3% 5% 4% 5% 5% 4% 17% 14% 6% 6% 6% 67% 61% 67% Q1 FY12 Q4 FY11 Q1 FY11 Other Exp Fuel Cost Employee Cost Depreciation Interest Tax PAT 4 P a g e

5 Exhibit 4: Coal Supply (Mn Tonnes, Percentage Share) 11, 8% 3, 10% FY11 Q1 FY12 31, 90% 127, 92% Imported Coal Domestic Coal Exhibit 5: Expected Capacity Additions During FY12E Project Capacity (MW) CoD Sipat Project I - Unit I 660 Q2 FY12 Sipat Project I - Unit II 660 Q3 FY12 Jhajjar Project 1,000 Q3 FY12 Vallur Project 1,000 Q4 FY12 Simhadri Project II 500 Q4 FY12 Mouda Project I * 500 Q4 FY12 Total 4,320 *Best Effort Basis Exhibit 6: NTPC's Coal Requirement & Sourcing Plan for FY12E Particulars Mn Tonnes Total Requirement for FY12E 164 Coal Sourcing From- Coal India Ltd. 115 SCCL # 10 New 11 Import* 23 Bilateral with SCCL # & Eastern Coal Ltd. 5 e-auction (Spot) If required # Singareni Collieries Company Annual allotment by Central Electricity Authority for projects commissioned after 1st April 2009 *Quantity refers to its domestic coal equivalent 5 P a g e

6 Exhibit 7: NTPC's Projects Under Construction Project Capacity (MW) Coal-fired Projects Sipat Project I 1,320 Simhadri Project II - Unit IV 500 Vallur Project I - JV with TNEB 1,000 Mouda Project 1,000 Indira Gandhi STPP Project - JV with IPGCL & HPGCL 1,000 Vallur Project I Phase-II -JV with TNEB 500 Bongaigaon Project 750 Rihand Project III 1,000 Vindhyachal Project IV 1,000 Muzaffarpur Expansion Project JV with BSEB 390 Nabinagar TPP Project - JV with Railways 1,000 Barh Project II 1,320 Barh Project I 1,980 Hydro Projects Koldam HEPP Project 800 Tapovan Vishnugad HEPP Project 520 Singrauli CW Discharge Project (Small Hydro) 8 Total 14,088 6 P a g e

7 Exhibit 8: NTPC s P/BV Trend NTPC's P/BV Given the strong business model, NTPC has emerged as a stable player in the current scenario of acute domestic coal shortages, soaring prices of imported coal, deteriorating power realisations and poor financial health of SEBs. Considering its secured coal linkages for FY12, robust portfolio of cost plus ROE PPAs and low debt-equity ratio, We expect the company to continue to display consistent performance. At current market price of Rs.174, the stock is trading at P/BV of 1.93x its FY12E Book Value of Rs.90 and 1.77x its FY13E Book Value of Rs.98. We value the stock at a multiple of 2.1x its FY12E Book Value and arrive at target price of Rs.189 a share. On our target of Rs.189, we see a limited upside potential of 9%. NTPC is the largest power producer in India, and with huge demand-supply mismatch in the sector the company will be a bellwether in sketching India s Infrastructure growth story. NTPC is thus a very strong Accumulate and can be a value protector in the current volatile market. 7 P a g e

8 Financials Exhibit 9: Standalone Income Statement (Annual) Particulars (Rs. crores) FY10 FY11 FY12E FY13E Revenue 48,221 56,519 62,145 70,784 EBITDA 11,669 15,796 16,187 18,807 EBITDA margin 24.2% 27.9% 26.0% 26.6% PAT 8,728 9,103 9,712 10,742 PAT margin 18.1% 16.1% 15.6% 15.2% EPS, Rs Exhibit 10: Key Ratios Particulars FY10 FY11 FY12E FY13E Book Value, Rs P/BV, x EPS, Rs P/E, x EV/EBITDA, x RoE 14% 13% 13% 13% RoCE 12% 12% 11% 11% Exhibit 11: Peer Comparison (On FY11 basis) Company CMP, Rs. P/BV, x P/E, x ROE ROCE Debt to Equity, x Adani Power Ltd % 3% 3.9 NTPC Ltd % 12% 0.6 Tata Power Company Ltd % 8% P a g e

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